Monopson

Monopson is one of the three extreme types of market structure, the other two types are perfect competition and monopoly.

The easiest way to show what a monopson is to present it as a mirror reflection of a monopoly. On the market with a monopoly structure, there is only one producer and many recipients. However, in the case of monopson, the situation is reversed and there is only one recipient of goods or services and many producers supplying these products.

Monopson and the price of production factors

An enterprise with a monopsonist position affects the prices of production factors, because it has to do with a growing supply curve of a given factor, it must offer a higher price to attract more.

The marginal cost of an additional unit of factor of production exceeds its price. Increasing the amount of the production factor used, the company must take into account the fact that in this way it raises the price paid to all previously employed units of this factor.

Monopsony and the demand for work

We can call a monopsonist the only or potentially the only buyer of a good coming from a given branch of the economy.

The market for production factors is a monopsony market. The growing supply curve of these factors means that the company must always offer higher prices for the services of a given factor as its demand for this factor increases.

An enterprise with a monopsonist position directly affects the prices of production factors. Due to the fact that it is dealing with a growing supply curve of a given factor, it is forced to offer a higher price to attract more of it. The marginal cost of the additional unit of factor of production exceeds its price. By increasing the amount of the manufacturing factor used, an enterprise must take into account that in this way it will increase the price paid to all previously employed units of this factor. As long as the monopsonist acquires additional quantities of the production factor, its marginal expenditure on them is not lower than the marginal income of the factor.

For companies on the perfectly competitive market, when purchasing production factors, the marginal and average expenses for these factors are leveled out, which means that these purchases do not change the prices of the factor. This rule does not apply to monopsony, because it affects the price of the factor. The market line of supply of a given factor presents a given amount from the monopsony point of view. Monopson pays the same price for each unit of the factor, so its supply determines the average expenses for its purchase. He must spend more if he wants to buy more. However, the size of the factor's employment is determined by marginal expenditure. Raising the price of the next acquired unit means at the same time an increase in the prices of all acquired units, so the marginal expenditure curve is above the average expenditure curve.

A monopsony enterprise must take into account the fact that increasing employment will raise the pay rate. Due to the fact that all employees must receive the same rates, the marginal cost of an additional employee can not be reduced only to the wage offered to him, but must also take into account the increase in the wage fund of employees previously employed. In the case of monopsony, the marginal cost of labor exceeds the rate of pay and increases with the increase in employment. The company maximizes its profit when the marginal revenue (income) obtained by employing an additional employee will be equal to its marginal cost. If this is not the case, it means that the company has the wrong size of employment. The goal of monopsony is to reduce demandenterprises for work.

On the perfectly competitive market, employees receive higher wages than under monopsony.

Examples of monopsons

• dairies (taking into account a small area) buying milk from farmers.

Advantages of Monopson

Monopson is a market structure where there is only one buyer in the market, and the buyers have significant influence on the prices that the suppliers are willing to accept. There are several advantages to operating in a monopson market structure, including:

• Lower Prices: With only one buyer in the market, the buyer has considerable bargaining power in negotiations, allowing them to get the best price from suppliers. This in turn leads to lower prices for consumers.
• Increased Efficiency: Monopson buyers can more easily control the production process and ensure that the production process is efficient and cost-effective.
• Reduced Risk: Since there is only one buyer in the market, the risks associated with market fluctuations are reduced as the buyer is not exposed to competition.
• Better Quality: A monopson buyer can rigorously enforce quality standards, ensuring that the suppliers are providing the highest quality goods and services.

Limitations of Monopson

Monopson is a market structure in which a single buyer has control of the market and is the only purchaser of a certain good or service. Although it has some advantages like increased bargaining power and lower prices, there are also several limitations to a monopsony market structure. These include:

• Lack of competition: The lack of competition in the market means that there are fewer incentives to innovate, reduce prices or increase quality.
• Reduced choices: Monopsony buyers can influence the market and reduce the choices available to consumers.
• Exploitation of workers: Monopsony buyers have more power and can pay workers lower wages than in a competitive market.
• Increased price instability: Prices in a monopsony market can be more volatile and unpredictable as buyers can suddenly change their purchasing decisions.
• Reduced efficiency: Monopsony markets can be inefficient as buyers have less incentive to invest in research and development.
• Limited market entry: Because the buyer has control of the market, it can be difficult for new sellers to enter the market.

Other approaches related to Monopson

In addition to the three extreme types of market structure (perfect competition, monopoly, and monopson), there are several other approaches related to monopson:

• Monopsonistic competition: This approach combines features of both monopolistic and competitive markets. Monopsonistic competition occurs when there are several buyers in the market who have some control over prices, but not enough control to be considered a true monopson.
• Oligopsony: This is a market structure where there are several buyers, but the market is still dominated by a few large buyers. This can lead to lower prices for consumers, but it can also create unequal bargaining power between buyers and sellers.
• Buyer concentration: This occurs when there is a large concentration of buyers in the market, but the market is still competitive. This situation can lead to higher prices for consumers, but also greater bargaining power for buyers.

In summary, there are several approaches related to monopson, including monopsonistic competition, oligopsony, and buyer concentration. All of these approaches can have different effects on prices and bargaining power in the market.

Monopson — recommended articles

Short run equilibrium — Price taker — Free competition — Price-Taker — Factors affecting supply — Change In Supply — Law of supply and demand — Factors affecting pricing — Joint demand

References

• Manning, A. (2003). Monopsony in motion.
• Manning, A. (2003). The real thin theory: monopsony in modern labour markets. Labour economics, 10(2), 105-131.