Monopsony Monopoly Buying

Monopsony Monopoly Buying

Monopsony, 'monopoly' buying by a sole buyer. Just as a firm may have monopoly power in the supply of a good or service, so there may be a firm on the buyers' side of the market the only firm which is buying a factor of production. The textconsumeraffairs.org.uk s generally analyse monopsony buying of factors, but it applies to any situation in which there is a monopoly element in buying, for example, consumers who banded together in a purchasing agency, a large store that is the only buyer of a particular product which it sells, a single big factory in a small isolated locality is the only buyer of some grades of labour.

Monopsony market conditions contrast with those under perfect competition. In conditions of perfect competition, no one firm is large enough for alteration in its output to affect the price of the product; and in the factor market no one firm buys a big enough proportion of the total services of a factor (say labour) for changes in its demand to affect its price (wage). In monopsony the firm's demand does affect the price at which it can buy its factor services. In the limiting case in which there is only one financier on the buying side, it has a unique position in the market. As it increases or decreases its demand for labour (or other factor), so wages (or other price) will rise or fall. Similarly a buying agency which bought a large share of the output of industry would face rising or falling price as its demand rose or fell. A financier employing all the labour of a kind in an area would find, if it wished to attract labour from elsewhere, that it had to pay a higher wage, and not only to the additional labour but also to all that which it was already employing. Thus the additional cost of employing a further unit of labour would have to include the increase due to the rise in the wage of all labour employed.

This analysis has interesting consequences for the determination of factor prices (see Distribution). In perfect competition, where marginal revenue equals the price of the product, the wage is equal to the value of the marginal (physical) product. If there is monopsony in the factor market the reasoning discussed under Distribution is generally valid but the monopsonist will engage labour until the marginal revenue product is equal to the marginal wage, and this is the addition to the wage bill when the marginal unit of labour is engaged. The outcome will be influenced by whether the monopsonist is also a monopolist in the product market.

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