Monopsony in the Labor Market

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This Demonstration graphically represents the simple model of monopsony, an imperfect market structure characterized by the market power of one buyer. Market power means the ability to influence the price in the market. The monopsonist unilaterally sets the price (or wage if it comes to the labor market with one employer) according to the standard condition of equivalence between marginal benefits and marginal costs. We consider the labor market where the wage for a unit of labor reflects the costs of the firm that can extract benefits (revenue) from employing labor .

Contributed by: Timur Gareev (November 2015)
Open content licensed under CC BY-NC-SA



The labor supply curve in this model reflects in essence the average costs for a monopsonist, so total costs are . "Marginal costs," understood as the derivative of total costs of the monopsony, are . It is important that is growing, so that the marginal costs curve is above the labor supply curve (with difference ). This means that employing additional units of labor needs higher wages not only for that unit but for all units employed.

What is the analog of "marginal revenue"? In general terms, some revenue function is concave. So the marginal revenue product of labor is the function , which decreases with (by definition, ). In the Demonstration, we can consider . As a rule, monopsony market wages are lower than in the competitive market.

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[1] Wikipedia. "Monopsony." (Nov 13, 2015)

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