Monopsony
1. Technical Terms and Synonyms
Monopsony, single-buyer market, buyer dominance, purchasing power concentration, employer market power. The term “monopsony” refers to a market condition in which a single buyer has significant control over price and quantity in the purchasing process. It is most often applied in labor economics, where an employer exercises disproportionate influence over wages and employment conditions. Synonyms such as “single-buyer market” or “buyer dominance” capture this asymmetry, in contrast to monopoly, which centers on seller power.
2. Concise Definition of Monopsony
A monopsony is a market structure in which a single buyer substantially controls demand, enabling them to set prices below competitive levels and influence market outcomes in their favor.
3. Classification of Monopsony
Monopsony is primarily studied in microeconomics and labor economics. It is the conceptual mirror of monopoly and appears in models of imperfect competition. Classic monopsony analysis is closely tied to Joan Robinson’s work on imperfect markets, while contemporary labor economics has expanded the concept to encompass partial monopsony and employer market power in segmented labor markets. Public procurement, agriculture, and health care are additional domains where monopsonistic behavior is analyzed. Game theory and institutional economics provide models for strategic and rule-based monopsony behavior.
4. Typical Characteristics
Monopsonies are characterized by a dominant buyer, low labor or supplier mobility, asymmetric information, and few alternative outlets for sellers or workers. As a result, the buyer can push prices below the equilibrium level that would prevail in a competitive market. In labor markets, this leads to wages below marginal productivity, reduced employment levels, and potential welfare losses. Barriers to exit, credentialing requirements, or geographical immobility often reinforce monopsony power. Monopsony may be explicit (e.g., a sole public employer) or diffuse (e.g., many small employers collectively exerting market power).
5. Graphs and Models of Monopsony
In monopsony models, the labor supply curve to the firm is upward-sloping, and the marginal cost of labor (MCL) lies above the supply curve because hiring additional workers requires paying higher wages to all employees. The firm maximizes profit by hiring labor where MCL = marginal revenue product (MRP), setting wages below MRP. This creates a wage-employment gap compared to the competitive equilibrium. The resulting diagram illustrates underemployment and allocative inefficiency. In advanced models, frictions like search costs and wage posting are also included.
6. Real-Life and Technical Examples of Monopsony
Public school systems, single-firm towns (also known as company towns), and national health services often exhibit monopsonistic traits as primary employers in their respective regions. In agricultural markets, large processors or supermarket chains may act as monopsonists relative to fragmented suppliers. In platform-based gig economies, dominant platforms like Uber may exercise effective monopsony over driver compensation. Technically, monopsony power is assessed using labor supply elasticity facing the firm, wage markdowns, and concentration ratios in employment markets.
7. Relevance in Research and Politics
Monopsony is increasingly relevant to labor market policy, wage inequality, and antitrust enforcement. Researchers have found growing evidence of monopsony power in modern labor markets, especially in low-wage service sectors. Political debates center around minimum wage laws, collective bargaining rights, and restrictions on non-compete clauses—all potential correctives to monopsony-induced distortions. In healthcare and military procurement, governments must strike a balance between monopsony power and supplier incentives and innovation.
8. Historical and Interdisciplinary Perspective
The concept of monopsony was introduced in Joan Robinson’s The Economics of Imperfect Competition (1933) as a counterpart to monopoly. Over time, labor economists have refined it through empirical work on wage-setting, turnover, and job mobility. Interdisciplinary approaches link monopsony to social power relations, institutional structures, and legal frameworks, including labor law and procurement policy. Feminist and critical political economy perspectives have emphasized how gender, race, and immigration status intersect with monopsony power in employment.
9. Critical Reflection and Debate
Critics of traditional monopsony models argue that real-world labor markets are more complex, involving factors such as multi-job search, implicit contracts, or non-wage job attributes. Others challenge the notion that monopsony power is widespread, arguing that high turnover and online platforms increase competition for labor. Nevertheless, new empirical research supports the presence of monopsony-like conditions in many sectors. Debates continue over how to detect monopsony power accurately, and what role public policy should play in correcting it without creating inefficiencies or disincentives for hiring.
10. Further Reading and References
-
Robinson, J. (1933). The economics of imperfect competition. Macmillan.
-
Manning, A. (2003). Monopsony in motion: Imperfect competition in labor markets. Princeton University Press.
-
Azar, J., Marinescu, I., & Steinbaum, M. (2017). Labor market concentration. NBER Working Paper No. 24147. https://doi.org/10.3386/w24147
-
Naidu, S., Posner, E. A., & Weyl, E. G. (2018). Antitrust remedies for labor market power. Harvard Law Review, 132(2), 536–601.
-
Ashenfelter, O., & Krueger, A. B. (1994). Estimates of the economic return to schooling from a new sample of twins. American Economic Review, 84(5), 1157–1173.
-
Card, D., Cardoso, A. R., & Kline, P. (2016). Bargaining, sorting, and the gender wage gap: Quantifying the impact of firms on the relative pay of women. Quarterly Journal of Economics, 131(2), 633–686. https://doi.org/10.1093/qje/qjw002
