monopsony

Monopsony is a market structure in which there is a single buyer of a good or input, while many sellers supply it. It is the opposite of a monopoly, where there is a single seller. Monopsony is a standard concept in microeconomics and is often discussed in the context of labor markets, though it can refer to any input market with concentrated demand.

In a monopsony, the buyer faces an upward-sloping supply curve for the input because hiring more workers requires offering higher wages to all workers. As a result, the marginal resource cost of labor exceeds the wage paid to existing workers. The firm maximizes profit where marginal revenue product equals marginal resource cost, which generally occurs at a quantity of employment and a wage below those in a perfectly competitive market. Therefore, both employment and wages tend to be lower than in competition, and there is a deadweight loss.

Examples include a single large employer in a town who hires most local workers; a processor that is the sole purchaser of farmers’ crops; and, in modern economies, monopsony can arise in specialized labor markets with high search costs or geographic concentration. The concept was developed in labor economics by Joan Robinson and others in the early 20th century.

Policy responses to monopsony power include minimum wage laws, collective bargaining, or public hiring, which can raise wages and sometimes employment, mitigating monopsony effects. Antitrust action against buyers with excessive market power and measures to facilitate labor mobility can also reduce monopsony power.