Download ECON 100: Monopsony A Monopsony The opposite to the case of a

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?