3.4.6 Monopsony

Edexcel A-Level Economics (9EC0) | Theme 3.4.6

Specification Coverage: Edexcel unit 3.4.6 - Monopsony. Students should be able to understand what a monopsony is, explain the monopsony labour market diagram, compare monopsony outcomes with competitive outcomes, analyse monopsonistic exploitation, and evaluate the impact of monopsony power and possible government responses.

What Is a Monopsony?

A monopsony is a market with a single buyer, or a dominant buyer, of a good, service, or factor of production.

Examples include a large supermarket chain buying from farmers, the NHS hiring nurses, or a major manufacturer in a small town.

Key Characteristics

  • The buyer is a wage maker or price maker, with the power to influence the price it pays.
  • A monopsonist is a profit maximiser and aims to minimise its costs.
  • It recognises that buying or hiring more means it must offer a higher price or wage for all units, not just the additional unit.

The Monopsony Diagram

In a labour market, a monopsonist faces an upward-sloping supply curve of labour, often labelled S = ACL.

To hire more workers, it must offer a higher wage, and that higher wage must be paid to all workers.

Monopsony diagram
Figure 1: The monopsony diagram shows the supply curve of labour (S = ACL), the marginal cost of labour (MCL), and the demand for labour (D = MRP). The monopsonist hires Qm workers at a wage of Wm, which is less than the competitive wage Wc and quantity Qc.

The Outcome of Monopsony Power

Lower wage: \( Wm < Wc \). The monopsonist depresses the wage, or the price paid to suppliers, below the competitive level.

Lower employment or quantity: \( Qm < Qc \). The monopsonist hires or buys less than would occur in a competitive market.

Exploitation: Workers or suppliers receive a wage or price that is less than their marginal revenue product. The gap between the wage and MRP at Qm measures the degree of monopsonistic exploitation.

Costs and Benefits of Monopsony

For the Monopsonist For Suppliers or Workers For Consumers and Society
Benefit: Lower costs and higher profits. Cost: Lower income or wages. Potential short-run benefit: Lower consumer prices if cost savings are passed on.
Cost: Fewer jobs or fewer outlets for goods. Major long-run cost: Market failure and under-utilisation of resources, such as unemployment or farm closures. Lower wages may also reduce quality and future supply, for example through shortages of nurses or teachers.

Government Intervention

Governments may respond to monopsony power in several ways:

  • introducing or strengthening minimum wages, which can raise employment in a monopsony market up to a point
  • empowering trade unions to negotiate collectively
  • using competition policy to regulate the buying power of large firms

Exam Preparation

  • Define monopsony and use real-world examples.
  • Draw and analyse the monopsony diagram and explain why the MCL curve lies above the supply curve.
  • Compare the monopsony outcome \( Wm, Qm \) with the competitive outcome \( Wc, Qc \).
  • Explain monopsonistic exploitation, where wage is less than MRP.
  • Evaluate the effects of monopsony power on different stakeholders.