5.4 Monopsony Notes

In perfectly competitive factor markets, the equilibrium wage is determined by the market and is taken as given by individual workers and firms (wage-takers).

Monopsony is a market condition where there is only one firm hiring in a particular market.
A monopsonist faces a similar problem to a monopolist. To hire one more worker, a monopsonist must raise the wage for all previous workers as well.
Marginal Resource Cost (MRC) is higher than the wage. The MRC curve is steeper than the supply curve, similar to how a monopolist's Marginal Revenue (MR) curve is steeper than the demand curve.

Monopolist's profit-maximizing rule: MR = MC (Marginal Revenue equals Marginal Cost).
A monopolist chooses the quantity (Q) based on the MR = MC rule and charges the highest possible price (P) according to the demand curve.
A monopsonist chooses the number of workers where MRP = MRC (Marginal Revenue Product equals Marginal Resource Cost) and pays them as little as possible, according to the supply curve.

Similar to a monopolist, a monopsonist hires an inefficiently low quantity of labor.
There are individuals willing to work for more than the wage being paid, but the monopsonist does not increase labor.

Monopsonies can exist in specific locations or very specific markets.
A small town built around a single factory, where the factory is the primary source of jobs, is an example of a monopsony.
If the factory wants to hire more workers, it needs to increase the wage for everyone.
Coal mine towns in Pennsylvania or West Virginia were often structured this way. Low wages led to dependency, which led to poor working conditions.
Monopsonies are less common today because of worker mobility, which is the ease with which workers can move to find new labor markets.

Unions are organizations that aim to raise wages and improve working conditions for their members.
Labor unions replace individual wage deals with collective bargaining, where the employer negotiates wages with union representatives.
Unions are frequently found in more monopsonistic labor markets (such as factories and mines).
Successful unions can lead to higher wages for workers.
A potential problem is that the factory may not be able to hire as many workers because they are forced onto decreased supply and MRC curves.
Sometimes, employers collectively attempt to pay lower wages than the competitive equilibrium. For instance, healthcare workers might argue that Health Maintenance Organizations (HMOs) collectively hold wages down.
In general, unions and collective bargaining are less common in the U.S. today.
The size of the U.S. labor market and worker mobility make it difficult to hold wages lower than the market equilibrium.