What is a monopsony?

What is a monopsony?

A monopsony is a monopoly for labor. Think about Google for instance. Google is a monopoly in their field and a monopsony when hiring workers.

By looking at the graph we start off with the Demand Curve which is downward sloping and the supply curve that is upward sloping. Nothing new here.

The difference starts when the hire more workers: instead of increasing the wage for the additional worker, they increase for everyone – the workers that came before as well. This means that the Marginal Cost of Labor is higher than the Average Cost of Labor.

The monopsonist has wage making power, and they will hire workers until MRP = MCL. this is the Revenue Maximization Point.

So they will hire at Qm, but instead of paying at Wp (MRP), they will pay at Wm, creating a deadweight loss. Note that the wage is the Average Cost of Labor.

In a perfect competitive market the wage would be set where Demand = Supply, more specifically where QL = WC.

Here, the quantity is reduced from QL to Qm and instead of paying at Wp, wages are set lower at Wm.

So, in comparison to a perfect compettive market, firms hire less workers and pay less.

And another point to consider when analysing monopolies is that the greater difference between WRP(Wm) and Wm, the higher the monopsonist power.