The economics of monopsony

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Monopsony is an important concern for many economies around the world. For example, recent academic studies discuss the potential for the exercise of monopsony power in labor markets and the effect on workers’ wages. In addition, companies often worry about concentration amongst their customers and how that might affect their ability to sell their output and obtain competitive prices. As this chapter will explain, a company with monopsony power will generally be able to purchase inputs at lower prices but will not typically pass on its lower input costs to its own customers in the form of lower final good prices. In fact, monopsony power in input markets typically leads to lower output than perfect competition, and hence to a higher price in the output market. It is thus not surprising that competition authorities have shown strong interest in monopsony-related issues.

This chapter explores the basis for the concerns described above by explaining the economic implications of monopsony power. From the producer’s perspective, the harm from monopsony is often obvious and intuitive. With fewer and more powerful buyers for their products, producers cannot find buyers for everything they would like to produce and, as a result, they are “forced” to take lower prices. However, from the perspective of the economy as a whole (including retailers and consumers), is monopsony with its lower prices really harmful? The chapter starts by introducing some key economic concepts. These concepts are essential to understanding the workings of monopsony and they will be used in the later parts of the chapter. The chapter then provides a simple example of monopsony. The example depends on a number of assumptions. The assumptions are then examined and relaxed one by one in order to discuss several issues that arise in monopsony cases.

This chapter appears in the 2023 edition of Antitrust Economics for Lawyers. For more information, click here.

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