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Monopsonists

The special case of the monopsonist is an important one. A monopsonist is a single buyer of
labour, such as De Beers, the diamond producer, and the major employer of diamond workers
in South Africa. Monopsonists are common in some small towns, where only one large firm
provides the majority of employment.
Because of their buying power, monopsonists are able to influence the price they pay
compared with buyers in more competitive markets. Pure monopsonists are rare because
suppliers normally have alternative outlets for their good or service. However, monopsony
power is significant in certain sectors of the economy.
Two areas are worthy of mention, including the monopsony power of the large supermarkets,
who can dictate terms to smaller suppliers, and the monopsony power associated with buyers
of labour in the labour market.
In the case of supermarkets, as with other dominant buyers, the price paid to suppliers is often
forced down so that the supermarkets can reduce costs and generate higher profits.
Alternatively they can reduce their prices, assuming they operate a cost plus pricing
strategy. In turn this can threaten rival suppliers, so increasing the monopsony power of the
major supermarkets. In an increasingly globalised world the supermarkets are free to source
supplies from around the world, thus making it difficult for smaller suppliers to compete.
In the case of single buyers of labour, a similar pattern can be found. Large employers, like
the NHS and the Post Office, have the potential power to determine the wage rate, but the rise
of labour unions has acted as a counterweight to the power of the monopolistic employer. In
addition, NHS and Post Office workers have the freedom to seek work in other industries, or
with other service providers.

Hence. if it wishes to employ more labour it must raise the marginal wage to attract new workers into the industry. when attracting new workers. This can be illustrated with the example of a hair salon in a small town.The monsopsonist. the monopsonist must pay all existing workers the same rate as the new workers. Workers Wage to attract Total cost of new workers labour Marginal cost of Marginal labour revenue product 1 10 10 2 20 20 + 20 = 40 30 60 3 30 30 + 30 + 30 = 90 50 50 4 40 160 70 40 5 50 250 90 30 6 60 360 110 20 7 70 490 130 10 8 80 640 150 0 70 The monopsonist's marginal cost of labour and supply curve . as the only employer. The supply curve of labour is not the same as the marginal costs of labour because. wages and employment Because the monopsonist is the only employer in the industry. the marginal cost of labour is greater than the existing average cost of labour.

it will demand labour up to the point where MCL = MRP. where the MCL and MRP are both £50 per hour. Assuming the monopsonist tries to maximise profits. meaning that the monopsonist has gained £20. if there are several hair salons in the town. and the MRP is £50 per hour. The competitive wage rate would exist where the wage to attract workers (the labour supply curve) equals the MRP curve.e. This will occur at 3 hairdressers. each salon will have to bid up the wage rate in order to attract sufficient hairdressers so that they can maximise their individual profits. and employing 4 hairdressers. at a rate of £40. . It can achieve this because it does not have to pay the full value of the MRP. wages are £30 per hour.However. the individual wage paid to the workers is only £30. the monopsonists is said to be exploiting the workers by paying less than the MRP – i. In this case. as shown below: However.

For example. and whether it is set above the market rate . At a minimum wage of £40. if the demand for labour is relatively inelastic. For example. demand will contract and fewer will be employed. with the MCL = ACL (S). For example. Similarly. the lower the level of employment. the market wage rate and the market level of employment. the supply of labour is horizontal at this wage. jobs lost due to the minimum wage will be relatively small. and the profit maximising monopsonist would employ up to the point where the MCL = MRP. the competitive rate? If a trade union enters the labour market and becomes the monopoly supplier of labour. it can force the monopsonist to pay a wage at. The impact of the union minimum wage also depends on the elasticity of demand and supply of labour.What if a union fixes a minimum wage? A union minimum wage However. what would happen if the union of hairdressers sets a minimum wage at £40. The impact of the union minimum wage The effect of the minimum wage clearly depends upon its level.i. which is at 4 workers . or nearer to. if supply is inelastic. A union can represent workers and seek to increase the benefits to workers.e. the market rate. and employ more workers. the minimum rate may not result in a significant change in employment.the greater it is above the competitive market rate. setting the wage at £60 would mean only 2 hairdressers are employed. . if the minimum wage is set above £40.