Monopsony pricing

Monopsony is the analogue of a monopoly, this time with market concentration on the demand side.

In a market with is a single buyer, the competitive pressure that drives price up to the efficient level is absent. The monopsonist will be able to set a price that maximizes total consumer surplus.

You can try varying price in the graph on the left to see how consumer surplus varies. On the right side, you can see the optimal monopsony pricing level.

Monopsonies are most prevalent in input markets, for instance that of raw agricultural products.

The quintessential monopsonistic market is the labor market: in virtually all industries and locations, there are far fewer employers than there are prospective employees.

In certain circumstances, there might be a single employer where a person can plausibly get hired (at least without changing fields or moving) - e.g. the market for doctors or nurses in towns with a single hospital, the market for retail services in areas where Walmart and other big box stores have driven out small competitors.

In the graph below, you can also vary the minimum wage (w_min) and the wage in a hypothetical public job guarantee program (w_public)

The graph above allows us to make the following key points:

  1. If the labor market is more concentrated on the demand (employer) side, the price that prevails is below the efficient level. A minimum wage that is tailored to not exceed the market-clearing wage (or at least not to so by a large margin) will induce higher employment and less deadweight loss.

  2. Try shifting w_min to above the market-clearing level: because supply of labor would then exceed demand, unemployment would be created.

  3. Shifting w_public to above the market-clearing level does not create unemployment, because the availability of a decent outside option truncates the supply curve itself.