Monopsony

Definition

Monopsony is a market structure where a single buyer exerts significant control over the market, particularly influencing the prices and quantity of goods or services purchased. This situation typically arises in labor markets where one employer dominates, giving them the power to set wages lower than in a competitive market, which affects both workers and overall market efficiency.

5 Must Know Facts For Your Next Test

1. In a monopsony, the single buyer can set lower prices for goods or wages for labor since they are the predominant purchaser in the market.
2. Monopsonies lead to deadweight loss, meaning resources are not allocated efficiently and some potential trades do not happen.
3. Workers in a monopsony may face lower wages compared to those in competitive labor markets due to the lack of alternative job options.
4. The presence of a monopsony can lead to reduced economic welfare, as it limits the bargaining power of workers and can result in lower overall income levels.
5. Examples of monopsonistic markets include certain sectors like healthcare, where a single hospital may dominate hiring in a region.

Review Questions

• How does a monopsony affect wage rates in a labor market compared to a competitive market?
  • In a monopsony, the single buyer has significant power over wage rates, allowing them to set wages lower than what would be established in a competitive labor market. Because there are fewer employment options for workers, they have limited bargaining power, leading to lower overall compensation. In contrast, competitive markets typically provide multiple employment opportunities, resulting in higher wage rates as employers compete for labor.
• Discuss how a monopsony leads to inefficiencies in resource allocation within an economy.
  • A monopsony causes inefficiencies because it distorts the normal supply and demand dynamics. By setting lower prices or wages, it results in deadweight loss where mutually beneficial transactions do not occur. This inefficiency can lead to a surplus of labor supply and an underemployment situation, which ultimately reduces overall economic productivity and welfare.
• Evaluate the broader economic implications of monopsonistic power on market competition and consumer choice.
  • Monopsonistic power can stifle competition by making it difficult for new firms to enter the market if they cannot compete with the pricing set by the dominant buyer. This lack of competition not only impacts suppliers or workers but can also affect consumer choice negatively. With fewer suppliers willing to participate in a market dominated by one buyer, consumers may face limited options and potentially higher prices for goods or services in other related markets due to decreased overall supply.

Related terms

Labor Market:

The arena in which employers seek to hire workers and workers seek employment, characterized by supply and demand for labor.

Wage Rate: The standard amount of compensation paid to employees for their work, often determined by market forces but influenced by monopsonistic power.

Market Failure:

A situation where the allocation of goods and services is not efficient, often due to the presence of monopolies or monopsonies that distort normal supply and demand.