Monopsony Market

Meaning: A monopsony market is a market situation where there is a

single consumer of goods and services with many suppliers. A
monopsony market occurs when a firm has the market power in
employing factors of production (e.g. labour). Good examples of
monopsonies exist in extreme communist economic systems such as
North Korea where the government is considered as the sole employer
of labour with many Koreans willing and able to offer labour services
to the government. Other examples of monopsonies are found in coal
mines where the coal mining firm is the primary source of employment
as well as in situations where the government is the sole employer of
civil servants, nurses, police and army officers. Note that a monopolist
could turn a monopsony firm in the consumption of input factors.
Features of a Monopsony Market
1. Number of buyers and sellers: Single buyer with many sellers.
2. Objective: Utility maximization via cost minimization strategy.
3. Entry requirements: Highly restrictive.
4. Control: The monopsony firm has absolute control over price and
quantity of inputs to hire. Thus, he determines his supply curve.
5. Rivalry: There is no rivalry or competition for the consumption of
input factors.
Price and Output Determination in a
Monopsony Market
In a monopsony market, price and output are determined where the
marginal utility of the monopsony equals the marginal cost. The price
here is the same as the supply price or cost of hiring inputs. Since his
objective is to maximize his consumption surplus, he sets his average
cost curve (supply curve) somewhat fairly elastic to allow for a gradual
increase in the supply price to induce more input factors (e.g. labour).
Graphical Illustration of Price & Output
Determination under a Monopsony Market
Price (wage)
MC

AC=S
E1

W E

W1 B
MU=Demand

Quantity
0 Q1 Q
Analysis of Price & Output Determination Under
Monopsony
The AC=S curve: This curve denotes the supply of inputs to the firm based on the law of
supply. The curve also indicates the unit cost of hiring the input factors.
The MC curve: This is the extra cost of hiring a unit of input of the firm. Suppose the
monopsony is a labour service consumer, an increase in the wage of hiring any worker on
the AC=S curve will result in increase in the wages of those already hired. This chain
reaction will spark an accelerating marginal cost making it to tilt outwardly from the supply
curve.
Equilibrium: At equilibrium, MU=MC (i.e. point E). This results in the monopsony
consuming OQ1 units of inputs deriving a total utility equivalent to OFE1Q1. This makes him
to maximize utility surplus equals W1FE1B. At this point he pays his workers a wage equals
0W1 , incurring a total wage bill equals 0W1BQ1. This further implies that the monopsony
can actually reduce the labour hours hired from Q to Q1 and the price (wage rate) from W to
W1. Thus a monopsony firm can determine both price and output in the industry