Monopsony and contestable markets
Introduced| English | Meaning |
|---|---|
| monopsony/ˈmɒnəʊpsəni/ | A market with a single buyer of a good, service or factor of production. |
| sunk cost/sʌŋk kɒst/ | A cost already incurred that cannot be recovered. |
A decision you can investigate
- A supermarket chain is the only buyer of a region’s farm produce and the main local employer.
- Should it push the price it pays farms as low as possible?
Build the explanation
- A monopsony 买方垄断 is a market with a single buyer; monopsony power means one buyer can influence the price it pays. As an employer it faces the labour supply curve as its average cost of labour, so the marginal cost of labour lies above supply: attracting one more worker means paying more to all.
- It hires where marginal revenue product equals marginal cost of labour, then pays the wage on the supply curve, so employment and the wage are both below the competitive outcome. A contestable market has easy entry and exit with low sunk costs, so potential entrants discipline incumbents; limit pricing holds price below the short-run profit maximum to make entry unprofitable, unlike predatory pricing which prices below average variable cost to drive existing rivals out.
Work through the evidence
- With labour supply W = 2 + 0.05L and MRP W = 12 − 0.05L, a competitive market sets 2 + 0.05L = 12 − 0.05L, so 0.10L = 10: L = 100 workers at W = 7 per hour.
- The monopsonist’s marginal cost of labour is W = 2 + 0.10L; setting MRP equal to it gives 0.15L = 10, so L ≈ 67 workers, and the wage read off supply is W ≈ 2 + 0.05 × 66.7 ≈ 5.3 per hour.
With supply W = 2 + 0.05L and MRP W = 12 − 0.05L, what does a competitive labour market pay?
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Supply = MRP gives 0.10L = 10, so L = 100 and W = 7; the 67/5.3 pair is the monopsony outcome.
Test the limits
- Monopsony gains for the buyer become consumer gains only if cost savings are passed on; suppliers may instead be squeezed into lower quality. Suppliers can organise into cooperatives and workers into unions to counter bargaining power.
- Contestability is a spectrum: high sunk costs make hit-and-run entry too risky, so even a concentrated market stays safe for incumbents; low sunk costs make even a monopoly behave competitively.
Where does the monopsonist’s wage come from?
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MRP = MCL fixes employment; the wage is then read off the lower supply curve.
A single buyer always makes consumers worse off.
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Buyer power becomes a consumer loss only when cost savings are not passed on; contestability rests on entry conditions, not firm count.
Apply and explain your answer
- Does the monopsonist pay the wage where MRP equals the marginal cost of labour?
- No: that intersection fixes employment at about 67; the wage is read off the supply curve at that employment, about 5.3.
What makes hit-and-run entry credible in a contestable market?
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Low sunk costs let an entrant enter, take profit and exit at little loss.
Use the terms precisely
- monopsony: A market with a single buyer, or one buyer dominant enough to set the price it pays.
- sunk cost 沉没成本: Spending that cannot be recovered on exit, such as industry-specific equipment.
Match the terms to their meanings.
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Use each term for its stated economic relationship.
With labour supply W = 2 + 0.05L and MRP W = 12 − 0.05L, a competitive market sets 2 + 0.05L = 12 − 0.05L, so 0.10L = 10: L = 100 workers at W = 7 per hour. The monopsonist’s marginal cost of labour is W = 2 + 0.10L; setting MRP equal to it gives 0.15L = 10, so L ≈ 67 workers, and the wage read off supply is W ≈ 2 + 0.05 × 66.7 ≈ 5.3 per hour.
Monopsony gains for the buyer become consumer gains only if cost savings are passed on; suppliers may instead be squeezed into lower quality. Suppliers can organise into cooperatives and workers into unions to counter bargaining power. Contestability is a spectrum: high sunk costs make hit-and-run entry too risky, so even a concentrated market stays safe for incumbents; low sunk costs make even a monopoly behave competitively.
A monopsony is a market with a single buyer; monopsony power means one buyer can influence the price it pays. As an employer it faces the labour supply curve as its average cost of labour, so the marginal cost of labour lies above supply: attracting one more worker means paying more to all.