Monopsony

A monopsony is a market with a single buyer, or a buyer large enough that it can lower the price it pays by buying less. It mirrors monopoly: a monopolist raises the price it charges by selling less, while a monopsonist lowers the price it pays by buying less. The term is most often applied to labor markets, where a dominant employer can pay wages below what workers would earn if employers competed for them, as they would under perfect competition.

The British economist Joan Robinson introduced the word in The Economics of Imperfect Competition (1933), crediting a classics scholar with suggesting it. A market with a few dominant buyers is called oligopsony, the buying-side counterpart of oligopoly. Monopsony is part of the wider study of market power and competition, and has become central to research in labor economics and to debates over the minimum wage.

Imagine a town where one large factory is almost the only employer. Workers who want a job there have few alternatives without moving house. The factory knows this, so it can offer a lower wage than it would have to pay if three other factories were competing for the same people.

The factory still has to pay enough to attract the staff it needs, and paying more would bring in more applicants. But raising the wage for new hires usually means raising it for everyone already working there, so the factory hires fewer people at a lower wage. The town ends up with fewer jobs and lower pay than a crowded job market would give.

A competitive firm hires until the wage equals the value of what one more worker produces, the marginal revenue product of labor (MRP). A monopsonist faces an upward-sloping labor supply curve, so the cost of one more worker, the marginal factor cost (MFC), is higher than the wage itself. The firm hires up to the point where:

• $\text{MRP}$ is the extra revenue produced by one more worker.
• $\text{MFC}$ is the extra cost of hiring one more worker, including the higher wage paid to all existing staff.

Worked example: suppose each worker adds $40 an hour to revenue, and the wage needed to attract $L$ workers is $w = 10 + L$ dollars. Total labor cost is $wL = 10L + L^2$, so the marginal factor cost is $\text{MFC} = 10 + 2L$. Setting $10 + 2L = 40$ gives $L = 15$ workers at a wage of $10 + 15 = 25$ dollars. In a competitive market, the wage would rise to $40 and employment to 30. The monopsonist employs half as many people and pays $15 an hour less than their contribution to revenue.

The model has an unusual implication. In a competitive labor market, a minimum wage above the market rate is expected to reduce employment. Under monopsony, a minimum wage set between the monopsony wage and the competitive wage can raise both pay and employment, because it removes the employer's reason to restrict hiring. In the example above, a minimum wage of $35 would make the firm hire 25 workers.

David Card and Alan Krueger's 1994 study of fast-food restaurants in New Jersey and neighboring Pennsylvania found no fall in employment after New Jersey raised its minimum wage, and monopsony was one explanation offered. Card shared the 2021 Nobel Memorial Prize in Economic Sciences partly for this research using natural experiments. Other economists, using different data and methods, have found job losses from higher minimum wages, and the size of the effect remains debated.

• Few local employers. Rural areas, company towns and specialized occupations, such as nurses in a region served by one hospital group, give employers wage-setting power.
• Job-switching costs. Even with many employers, the cost and risk of changing jobs, limited information and non-compete clauses make labor supply to each firm less elastic. A 2024 Federal Trade Commission rule banning most non-compete agreements was set aside by a federal court in Texas in August 2024.
• Single public purchasers. National health systems buying medicines, and defense ministries buying weapons, act as powerful buyers; supporters see this as a way to restrain prices.
• Agriculture and retail supply chains. A few meatpackers, grain traders or supermarket chains buying from many farmers or suppliers can depress the prices those suppliers receive. In the United States, the Packers and Stockyards Act of 1921 was passed partly in response.

Responses to monopsony include minimum wages, collective bargaining through trade unions, which can create a countervailing "bilateral monopoly", limits on non-compete agreements, and merger control that considers effects on workers and suppliers as well as consumers. The US 2023 Merger Guidelines explicitly cover labor markets, and antitrust authorities in several countries have prosecuted "no-poach" agreements between employers as a form of cartel.

Skeptics argue that most workers can choose among many employers, that commuting and remote work widen choice, and that measured wage gaps may reflect differences in skill rather than buyer power. Supporters point to studies finding that wages respond only weakly to employers' pay changes, which is consistent with widespread mild monopsony. Arguments about labor market flexibility, inequality and stakeholder capitalism often draw on this research.

• The Nobel Prize: Economic Sciences 2021 (Card, Angrist and Imbens)
• US Department of Justice: Merger Guidelines