Micro CHAPTER 5.4:

CHAPTER SUMMARY

A monopsony is, in a way, the opposite of a monopoly. In a monopoly, there is only one seller, but in a monopsony, there is only one buyer. If a company has a monopoly on a certain product, such as being the only airline in a country, they might be the only purchaser in the pilot and flight attendant labor markets. Monopsonistic markets have the following characteristics:

• One firm does all hiring and is large enough to control the market

• The firm sets the wages for the market (wage-maker)

• If the firm wants to increase the number of workers, it must raise the wage

• If the firm cannot wage discriminate, the MRC is greater than the wage per worker, because adding one worker by raising the wage means the firm must raise the wage for all workers

• Because the market is not perfectly competitive, the wage rate will be below the workers' MRP

The chart of a monopsonistic market is, in some ways, similar to that of a monopoly. This is because, just like how the MR curve falls more sharply than the demand curve in a monopoly, the MRC curve rises more sharply than the supply curve in a monopsony. As you can see in the graph below, the monopsonistic firm will hire the quantity of workers where MRC = MRP, but the equilibrium wage will be the point on the supply curve that corresponds with that quantity.

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