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🛒principles of microeconomics review

Monopsonistic Competition

Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025

Definition

Monopsonistic competition is a market structure in which there is a single buyer (a monopsony) that faces competition from other buyers for the same product or service. In this scenario, the monopsony has significant market power and can influence the price and quantity of the good or labor it purchases.

5 Must Know Facts For Your Next Test

  1. In a monopsonistic labor market, the employer has the power to set wages below the competitive level.
  2. The monopsony can maximize profits by employing fewer workers and paying a lower wage compared to a perfectly competitive labor market.
  3. The supply of labor to a monopsony is upward-sloping, meaning that the monopsony must pay a higher wage to attract more workers.
  4. The socially optimal level of employment is higher than the monopsony's profit-maximizing level of employment.
  5. Minimum wage laws can help address the inefficiencies created by monopsonistic competition in the labor market.

Review Questions

  • Explain how a monopsony can influence the wage and employment levels in a labor market.
    • In a monopsonistic labor market, the single buyer (employer) has significant market power and can set wages below the competitive level. The monopsony faces an upward-sloping labor supply curve, meaning it must pay a higher wage to attract more workers. By employing fewer workers and paying a lower wage, the monopsony can maximize its profits. This results in a lower level of employment and wages compared to a perfectly competitive labor market, which is socially suboptimal.
  • Describe the relationship between the monopsony's Marginal Revenue Product (MRP) and the wage it pays in the labor market.
    • In a monopsonistic labor market, the monopsony's profit-maximizing wage is determined by the relationship between the Marginal Revenue Product (MRP) of labor and the wage. The monopsony will hire workers up to the point where the MRP of the last worker hired equals the wage paid. Since the monopsony faces an upward-sloping labor supply curve, it must pay a higher wage to attract additional workers. This means the monopsony's profit-maximizing wage will be lower than the competitive wage, leading to a lower level of employment compared to a perfectly competitive labor market.
  • Evaluate the role of government intervention, such as minimum wage laws, in addressing the inefficiencies created by monopsonistic competition in the labor market.
    • Minimum wage laws can help address the inefficiencies created by monopsonistic competition in the labor market. By setting a wage floor above the monopsony's profit-maximizing wage, minimum wage laws can increase employment and move the market closer to the socially optimal level. This helps to counteract the monopsony's ability to pay wages below the competitive level and employ fewer workers than the socially optimal amount. However, the effectiveness of minimum wage laws in a monopsonistic labor market depends on the specific level of the minimum wage and the elasticity of labor supply, as an excessively high minimum wage could lead to job losses.