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.

The monsopsonist, wages and employment

Because the monopsonist is the only employer in the industry, if it wishes to employ more labour it must raise the marginal wage to attract new workers into the industry. The supply curve of labour is not the same as the marginal costs of labour because, as the only employer, the monopsonist must pay all existing workers the same rate as the new workers. Hence, when attracting new workers, the marginal cost of labour is greater than the existing average cost of labour.

This can be illustrated with the example of a hair salon in a small town.

Workers Wage to attract new workers Total cost of labour Marginal cost of labour Marginal revenue product
1 10 10 70
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

The monopsonist’s marginal cost of labour and supply curve

However, the individual wage paid to the workers is only £30. In this case, the monopsonists is said to be exploiting the workers by paying less than the MRP – i.e. wages are £30 per hour, and the MRP is £50 per hour, meaning that the monopsonist has gained £20. It can achieve this because it does not have to pay the full value of the MRP.

Assuming the monopsonist tries to maximise profits, it will demand labour up to the point where MCL = MRP. This will occur at 3 hairdressers, where the MCL and MRP are both £50 per hour, as shown below:

However, if there are several hair salons in the town, each salon will have to bid up the wage rate in order to attract sufficient hairdressers so that they can maximise their individual profits. The competitive wage rate would exist where the wage to attract workers (the labour supply curve) equals the MRP curve, at a rate of £40, and employing 4 hairdressers.

What if a union fixes a minimum wage?

A union minimum wage

A union can represent workers and seek to increase the benefits to workers. For example, what would happen if the union of hairdressers sets a minimum wage at £40, 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, or nearer to, the market rate, and employ more workers.  At a minimum wage of £40, the supply of labour is horizontal at this wage, with the MCL = ACL (S), and the profit maximising monopsonist would employ up to the point where the MCL = MRP, which is at 4 workers  – i.e. the market wage rate and the market level of employment.

However, if the minimum wage is set above £40, demand will contract and fewer will be employed. For example, setting the wage at £60 would mean only 2 hairdressers are employed.

The impact of the union minimum wage

The effect of the minimum wage clearly depends upon its level, and whether it is set above the market rate – the greater it is above the competitive market rate, the lower the level of employment.

The impact of the union minimum wage also depends on the elasticity of demand and supply of labour. For example, if the demand for labour is relatively inelastic, jobs lost due to the minimum wage will be relatively small. Similarly, if supply is inelastic, the minimum rate may not result in a significant change in employment.

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See also: Monopsony power and remedies

Case: Price fixing by European model agencies