Monopsony

Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT

Meaning

A monopsony is a market with only one buyer. Because that buyer faces no rival buyers, it pays less than the competitive price for what it buys (wages, crops) and it also buys less than a competitive market would. Joan Robinson coined the term in 1933.

It matters because monopsony hurts sellers, such as workers and farmers, not consumers. It explains why wages or crop prices can stay low even when there is no shortage of demand for the goods those workers and farmers produce.

Key rule: the monopsonist hires or buys up to the point where marginal cost of labour (MCL) = marginal revenue product (MRP). It then pays only the wage given by the supply curve at that quantity, which is lower than MRP.

Explanation

How a monopsonist sets wages and quantity

• A competitive firm is a wage taker. It can hire as many workers as it wants at the market wage.
• A monopsonist is a wage maker. It faces the whole upward-sloping labour supply curve, which means it must offer a higher wage to attract more workers.
• Why the monopsonist's extra cost is above the wage:
• To hire one more worker, it must raise the wage.
• It usually has to give that higher wage to all its workers, not just the new one.

• So the marginal cost of labour (the extra cost of hiring one more worker) is higher than the wage itself.

• What follows:

• It stops hiring earlier than a competitive market would, so employment is lower.

• It pays only the wage the supply curve needs at that lower level, so wages are lower.

• Marginal revenue product (MRP) is the extra revenue one more worker brings in. Under monopsony, the wage is below MRP. Workers get less than the value they add.

Worked example

Labour supply: w = 10 + L. MRP of labour: MRP = 70 − L.

	Competition	Monopsony
Rule	Supply wage = MRP	MCL = MRP
Equation	10 + L = 70 − L	MCL = 10 + 2L, so 10 + 2L = 70 − L
Workers hired (L)	30	20
Wage (w)	40	30 (read off the supply curve: 10 + 20)

• Result: 10 fewer jobs and a wage ₹10 lower.
• Look at the gap at L = 20:
• MRP = 70 − 20 = 50, but the wage = 30.

• So each worker adds 50 to revenue but is paid only 30.

• The MCL line (10 + 2L) has twice the slope of the supply line (10 + L). This mirrors monopoly, where the MR line has twice the slope of the demand line.

What makes monopsony power stronger or weaker

• Stronger when:
• there are few other buyers nearby, for example one mill or one factory in a region;
• sellers cannot move, because workers are tied to a place, or crops are perishable and must be sold quickly;

• the law ties sellers to one buyer, as with cane "reserved areas".

• Weaker when:

• more buyers enter the market (market reform, wider trading platforms);
• sellers bargain together (unions, farmer groups);

• the State sets a floor price or minimum wage.

• Minimum wage twist (textbook result): under monopsony, a minimum wage can raise both wages and jobs.

• In the example, a minimum wage of 40 makes the extra cost of each worker a flat 40, up to the point where supply meets that wage.
• The firm hires until MRP = 40, so L = 30.
• Wage goes from 30 to 40, and jobs go from 20 to 30. This matches the competitive result.

In India

• Sugar mills in cane "reserved areas":
• Farmers in a reserved area must sell their cane only to the mill assigned to that area.

• For each farmer, that mill is effectively the single buyer, which is a textbook monopsony created by rule.

• Gig workers:

• Delivery and ride-hailing workers who face one dominant platform have little choice of buyer for their labour.

• The platform can set pay rates and terms.

• APMC mandis (a close cousin, oligopsony):

• Trader cartels in mandis, meaning a few large buyers acting together, can hold down the auction prices paid to farmers.

• Legal check:

• Section 4 of the Competition Act, 2002 bans abuse of a dominant position. Being dominant is legal; misusing that position is not [2].

• The Competition Commission of India (CCI) was set up with effect from 14 October 2003 [1].

• Policy answers used in India:

• more buyers (e-NAM-type platforms);
• floor prices and minimum wages;
• collective bargaining through Farmer Producer Organisations (FPOs) and worker unions.

Don't confuse with

• Monopoly: one seller. It raises the selling price (P > MC) and hurts consumers. A monopsony is one buyer. It lowers the buying price and hurts sellers such as workers and farmers.
• Oligopsony: a few large buyers facing many sellers, for example APMC trader cartels. A monopsony has exactly one buyer.
• Bilateral monopoly: one seller facing one buyer, for example one trade union bargaining with one employer. Theory does not fix the price. It falls between the two sides' limits, depending on bargaining power. In a monopsony, the single buyer faces many sellers, so the buyer sets the price.
• Monopolistic competition: many sellers of slightly different products. It is about seller power, not buyer power. Do not mix it up with monopsony because the names sound alike.

Prelims Hooks

• Monopsony = single buyer. The term was coined by Joan Robinson (1933).
• Under monopsony, both wage and employment are below competitive levels. This is not just a lower wage.
• The monopsonist hires where MCL = MRP and pays the wage given by the supply curve, so wage < MRP. MCL > wage because a higher wage must be paid to all workers.
• Sugar mills in cane reserved areas are the standard Indian monopsony example. APMC trader cartels are oligopsony, not monopsony (a common trap).
• Bilateral monopoly (one union and one employer) has an indeterminate price, which is set by bargaining power.
• Section 4 of the Competition Act, 2002 bans abuse of dominance, not dominance itself [2].

Mains Points

• Farm incomes (GS-III, agricultural marketing):
• Cane reserved areas and mandi cartels push crop prices below competitive levels. Farmers then earn less and grow less.
• Remedies: widen the number of buyers (e-NAM-type platforms), give floor prices, and build farmers' bargaining power through FPOs. The last one turns a monopsony into a bilateral monopoly.

• Trade-off: reserved areas give mills an assured supply of cane, but they take away farmers' choice of buyer.

• Labour markets and the gig economy (GS-III, employment):

• A dominant platform can hold down pay and hire fewer workers than a competitive market would.

• Monopsony theory shows that a well-set minimum wage or collective bargaining can raise pay without cutting jobs. This answers the usual objection that minimum wages always destroy jobs.

• Competition policy gap (GS-II/III):

• Competition law is usually discussed as protecting consumers from sellers.
• Monopsony shows that sellers, meaning workers, farmers and small suppliers, also need protection from powerful buyers.
• Section 4's ban on abuse of dominance [2] can be used against a dominant buyer as well as a dominant seller.

Related concepts

• Monopoly
• Natural monopoly
• X-inefficiency
• Price discrimination
• Oligopsony
• Bilateral monopoly

Read more

• Monopoly, natural monopoly, monopsony and price discrimination