Monopsony Research Paper

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A competitive market has many buyers and sellers, none of whom can influence market price. By contrast, a market with many buyers and one seller who can influence price is termed a monopoly, whereas if there is only one buyer and many sellers we say that the buyer is a monopsonist. For example, a government may effectively compel farmers to sell to a state monopsonist (marketing board). Because the latter is the sole buyer, it may use this dominant position to lower the price it pays to sellers, thus generating monopsony profits (see Bonner 1988). A market with a small number of large buyers who have some monopsony power is known as an oligopsony, whereas a market with many buyers and sellers but where each buyer still has some monopsony power is said to have monopsonistic competition (see Bhaskar, Manning, and To 2002 for a discussion).

Joan Robinson (1932) first used the term monopsony in a discussion of the labor market (see Thornton 2004 for a discussion of the origin of the term). While there may be monopsony power in any market, its application to the labor market has dominated the literature. The standard early monopsony model was the “company town model.” The idea is as follows: In a relatively isolated town, an employer may be large enough to affect the market wage in that town. If the employer lowers/raises employment, the market wage will fall/rise. If the town is relatively isolated, travel costs will prevent other companies from competing for workers. However, in recent decades, as both labor and capital have become more mobile, it has become less credible that an employer could pay less than the competitive wage without other firms moving to town and competing away the lower wage, or workers availing themselves of higher wages elsewhere.

More recent models such as Burdett and Mortensen (1998) or Bhaskar and To (1999) can be used to rationalize monopsony power in modern labor markets. If there are search costs associated with either workers finding jobs or employers finding workers, or if workers have preferences for particular employers, firms may have some monopsony power that allows them to pay a wage below the competitive wage. The source of monopsony power here is that a worker may accept a relatively low wage offer from an employer if continuing to search for a better offer is costly. In these models, there is monopsonistic competition in that there may be many employers, but each has some monopsony power.

Manning (2003) discusses the implications of such models for a wide range of important labor market topics. For example, in a monopsony model, the impact of minimum wages or trade unions on employment and efficiency are ambiguous, in contrast to more traditional competitive models of the labor market where minimum wage or unions typically lower employment and are inefficient. Monopsony/search models also provide a rationale for frictional unemployment and wage discrimination against women if women are less mobile across jobs than men.

Monopsony models, such as the job-search models referred to earlier, also provide a plausible way of understanding observed features of labor markets that are difficult to rationalize in other models. For example, if it is costly and time-consuming for workers to search for jobs, a search model predicts that there will always be some frictional unemployment even when the economy is doing well. Another long-standing puzzle in labor economics is the large differences in observed wages between similar workers doing similar jobs. Monopsony models provide a rationale for these observed wage differences. More traditional competitive models of the labor market, on the other hand, deal inconsistently with these differences in wages (see Mortensen 2003 for a discussion of this issue).

Bibliography:

  1. Bhaskar, V., Alan Manning, and Ted To. Oligopsony and Monopsonistic Competition in Labor Markets. Journal of Economic Perspectives 16 (2): 155–174.
  2. Bhaskar, V., and Ted To. Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonistic Competition. Economic Journal 109 (455): 190–203.
  3. Bonner, 1988. A Reporter at Large: Indonesia. The New Yorker, June 13: 72–91.
  4. Burdett, Kenneth, and Dale T. Mor 1998. Wage Differentials, Employer Size, and Unemployment. International Economic Review 39 (2): 257–273.
  5. Manning, 2003. Monopsony in Motion: Imperfect Competition in Labor Markets. Princeton, NJ: Princeton University Press.
  6. Mortensen, Dale T. Wage Dispersion: Why Are Similar Workers Paid Differently? Cambridge, MA: MIT Press.
  7. Robinson, J 1932. The Economics of Imperfect Competition. London: Macmillan.
  8. Thornton, Robert 2004. How Joan Robinson and B. L. Hallward Named Monopsony. Journal of Economic Perspectives 18 (2): 257–261.

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