Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
ECON 100: Monopsony A Monopsony The opposite to the case of a monopoly is the case of a monopsony. The idea is that instead of having a single supplier who can differentiate between consumers, you have a single buyer who can differentiate between the different sellers. Let the dimension on which the firm chooses its production be on labor. The choice of amount of labor to hire then determines the amount of output. Let the firm’s production technology by which it obtains the level of output be described by F(L) where L is the amount of labor hired, and F is the equation that describes how the technology creates the output. In terms of the profit equation, it becomes max π = max PF (L ) − (a + bL )L L L where w = a + bL ⇒ VMPL = P × MPL = a + 2bL = MC L Where P is the price of the good produced. The significance of this is the following, because the firm is the sole buyer of labor, it has the power to choose to pay a lower level of wages then the workers truly deserve. How do we see it? When the firm operates within a competitive industry, it like in the case of perfect competition in the output market cannot change the level of wages in equilibrium. So its profit equation is max π = max PF (L ) − wL L L ⇒ VMPL = P × FL = P × MPL = w = MC L Diagrammatically, Marginal Cost of Labor Labor Supply VMP* wc Monopsony Choice Competitive Choice w’ Labor Demand/Value of Marginal Product of Labor So what happens is that because the firm is the sole buyer, it has the power to dictate the wage it wants to set, and in fact pays workers less than they truly deserve. From the diagram, the demand tells you the value of the marginal product labor creates. But because the firm is the sole buyer, it can discern between the marginal cost and supply of labor. The monopsonist chooses the point where the marginal cost of labor and equates ECON 100: Monopsony with the value of marginal product and gets VMP* (equilibrium value of marginal product. We call it value of marginal product, because we are multiplying the marginal product of labor to the price of the product they make.). However, it knows the workers would work for less based on their labor supply, and so pays w’. So in effect, the workers would be taken advantage of if they are not organized. An example would be the sports franchises, like MLB, NHL, NLL, MLS and NFL. Do you think this provides the rational for why the players are always represented by a players association or union? Could we examine what happens if we have one buyer and one seller? How could we model this? Another example of this is Teacher’s Union versus school boards, and other industries as well. Unfortunately, once we have two parties who potentially have market power, we can no longer apply our standard demand and supply models. The idea is the following, if they both have power, thereby can effectively threaten the other, for example the monopsonist can threaten to have a lock out, while the unions could go into a strike. Well who has the real threat, what economists term credible (believable) threat? Think about the lock out of two years ago in the NHL. There is the additional question of why do we see such a great prevalence of unions even in industries that are competitive, especially in Canada (Unions in the US has been falling). One possible answer is that although the firms may be operating in a competitive output market, they may be the sole or largest employer in the location they are at, which confers on the firm monopsony powers. Even then, we still see union formation in large cities. Why? This will lead us into other market structures, and the idea of power conferred by product differentiation. Think about the following, is Coca Cola really the same as Pepsi Cola. Is St. Mary’s University, Mount St. Vincent University, and Acadia University offering the same product? Or University of Toronto, Ryerson University, and York University? I do not want to leave you with the uncontested notion that unions are always good. Else it may lead you towards ideals of the ultimate union, a communistic economy. Granted that, Canadian Economist has found significant evidence that unions has been good to the general populace, but recall a conjecture I highlighted at the beginning of our school year that the argument may not hold if we extend our analysis beyond one generation. The idea behind the conjecture is the following, would an individual who lives through hard times ensure that their offspring gets the best to rise above their own circumstance then one who had their circumstance muted by aid. Consider the following empirical observations found by economist. Through the past decades, the children of parents of different income groups have virtually remained in their parents’ income brackets If unions had been so effective, why haven’t we seen more mobility of children away from different quantiles of income. Why aren’t outcomes more random?