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14 1 Price-Setting Buyers: The Case of Monopsony Principles of Economics

Monopsony can also be common in labor markets when a single employer has an advantage over the workforce. When this happens, the suppliers—in this case, the potential employees—agree to a lower wage because of factors resulting from the buying company’s control. This wage control drives down the cost to the employer and increases profit margins. Consequently, there is not only an accumulation of profits in the hands of brands, but also a transfer of surplus from the Global South to the Global North. A subsidy extracted from the poorest sections of producers in the value chain that, in addition, is transferred from the Global South to the Global North.

  1. One major development in medical care in recent years has been the emergence of managed care organizations that contract with a large number of employers to purchase medical services on behalf of employees.
  2. This is because, by assumption, the firm has to increase the wage paid to all the workers it already employs whenever it hires an extra worker.
  3. By promoting fair competition and protecting suppliers from exploitation, policymakers can help create more efficient and equitable markets that benefit both buyers and sellers.
  4. A price-setting firm faces an upward-sloping supply curve such as S in Panel (b).
  5. In 1977, a lawsuit filed by several baseball players resulted in the partial dismantling of the reserve clause.

Oracle and Cisco have sometimes been accused in the media of discreetly agreeing not to compete on wages. The monopsonist can call the shots monopsony examples in india regarding prices and product descriptions. A monopsony is unique to other forms of market situation with distinctive market features.

In a monopsony, a minimum wage can increase wages without causing unemployment. The suffix ‘opoly’ – n economic terms, the suffix (word ending) “-opoly” denotes the number of sellers in a market and the distribution of market power. For example, the prefix “mono” in “monopoly” means a single or one seller, while “duo” in “duopoly” means two sellers.

Monopsony Characteristics

By effectively creating a wage cartel, pay is suppressed so that tech giants can realize lower operating costs and greater profits. In such cases, the collusion by a group of large companies is, in effect, a monopsony. The first-order condition for maximum profit is then satisfied at point A of the diagram, where the MC and MRP  curves intersect. This determines the profit-maximizing employment as L on the horizontal axis. The corresponding wage w is then obtained from the supply curve, through point M. They fear these industry giants will influence pricing power and exert their ability to suppress industry-wide wages.

The closest you might get to a real-life monopsony is the supermarket retailers. There is more than one buyer of the good, but there are still thousands of farmers and other suppliers. Firms such as Walmart are able to negotiate in a similar fashion to a firm that has monopsony power. The main difference is that there are a few, if only a limited amount of buyers – which means it cannot classify as a monopsony. The supermarket has the choice of 1,000 suppliers but is the only buyer that those companies can go to. So if the supermarket doesn’t buy from them, they will likely go out of business.

Understanding a Monopsony

There is a small village that has 50 houses for sale at the same time. The village is quite small and the demand to live there isn’t that high. US government contracts represent eighty-five percent of Lockheed Martin’s yearly sales. Computer Age Management Services (CAMS) is a Mutual Fund Transfer Agency for Indian Asset Management Companies with a share of ~ 70% of the Assets Under Management (AUM).

Criticisms of Monopsonies

Monopsony is a rare market condition that is rarely found in real life. It is a market condition where there is only a single buyer for the good or product being offered for sale. Many sellers are selling that particular good, which is why the buyer is said to be in complete control of this market situation.

A firm can set price in a factor market if, instead of a market-determined price, it faces an upward-sloping supply curve for the factor. This creates a fundamental difference between price-taking and price-setting firms in factor markets. A price-taking firm can hire any amount of the factor at the market price; it faces a horizontal supply curve for the factor at the market-determined price, as shown in Panel (a) of Figure 14.1 “Factor Market Price Takers and Price Setters”. A price-setting firm faces an upward-sloping supply curve such as S in Panel (b). To obtain a larger quantity, such as Q2, it must offer a higher price, P2. There are many market conditions prevailing in the economy for different kinds of goods sold depending on the number of sellers available in the market and the number of buyers willing to buy that product in the market.

The lower employment and wages caused by monopsony power have two distinct effects on the economic welfare of the people involved. Because there is only one buyer for a good or service, the buyer sets the demand, and therefore, controls the price. Monopsonies, like monopolies, are inefficient to a free market, where supply and demand regulate prices to be fair for consumers. The factory is the only real employer in town, it can set wages below market prices, and determine how many individuals will be employed at any time. This has a ripple effect on the rest of the community, such as the other types of businesses set up in town, the amount they can charge, and how many people they can hire. Market inefficiencies arise when the single consumer buys less of the good or service than would be produced in a more competitive market.

The review also concluded “That labour markets have important elements of monopsony power is becoming clear beyond reasonable doubt” (22). Suppose the monopsony firm is now using three units of the factor at a price of $6 per unit. Given the supply curve, the only way the firm can obtain four units of the factor rather than three is to offer a higher price of $8 for all four units of the factor.

One explanation could be that when they were signed to contracts, these players were expected to perform well, so their salaries reflected their expected contributions to team revenues. Their actual performance fell short, so their wages exceeded their MRPs. Another explanation could be that teams paid young players more than they were expected to contribute to revenues early in their careers in hopes that they would develop into profitable members of the team.

In turn, the buyer is able to use this differential in negotiating power to lower the price of their preferred house. If any of the people living in the town want another job, they either have to set up a company of their own or leave town to the city. With that in mind, the manufacturer is able to pay lowers wages as the people of the town would prefer to work for a low wage than the other alternatives. An example of a monopsony occurs when there is one major employer and many workers seeking to gain employment. Giant supermarkets often behave like monopsonists, even though they are not the only buyer. They have virtually absolute power when purchasing goods from milk producers, farmers, wine growers and other suppliers.

In economics, a monopsony is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers. The microeconomic theory of monopsony assumes a single entity to have market power over all sellers as the only purchaser of a good or service. This is a similar power to that of a monopolist, which can influence the price for its buyers in a monopoly, where multiple buyers have only one seller of a good or service available to purchase from. In garments, where the knowledge required for production is not very complex and not protected by IP systems, brands calculate costs (including labour costs) based on national minimum wages. On the other hand, lump-sum contracts for IT services do not specify labour or other costs.

Major retailers often have some monopsony power with respect to some of their suppliers. Sears, for example, is the only wholesale buyer of Craftsman brand tools. One major development in medical care in recent years has been the emergence of managed care organizations that contract with a large number of employers to purchase medical services on behalf of employees. These organizations often have sufficient monopsony power to force down the prices charged by providers such as drug companies, physicians, and hospitals. Countries in which health care is provided by the government, such as Canada and the United Kingdom, are able to exert monopsony power in their purchase of health care services.

Workers who were indirectly employed through labour contractors found that some contractors even switched off their phones and disappeared. As detailed in the AFWA report Money Heist, there was a massive wage theft—one that pushed more than 80% of garment workers in six countries (Bangladesh, Cambodia, India, Indonesia, Pakistan and Sri Lanka) into poverty (AFWA 2021). Over the next few months, brands revived their demands and contracted new production. In March 2020, as the COVID-19-pandemic-induced recession struck many parts of the world, garment brands from the Global North took action to protect their cash reserves and share values. Garment suppliers in Asia ended up with the largest number of cancelled orders. These actions were taken even as governments in the Global North began pouring in money to shore up their firms and stock markets and to support their workers.

These chains can leverage their market dominance to negotiate lower prices for the produce, putting pressure on farmers who have limited alternative buyers. In order for the buyer to assert power over suppliers, it must have a large choice to choose from. As there is a high level of competition among suppliers, prices are driven down as they need the custom from the buyer to stay in business.