My research topic is imperfect competition in labor market. I started to search about the studies about the effects of a firm’s monopoly or monopsony power on wages and hiring. I evaluate my paper with the major features of U.S. labor legislation which is about the evolution of the labor union movement, the effects of wage discrimination on the efficiency of the labor market and the overall effects of unions on economic performance. Imperfect competition means perfectly competitive markets which maximize economic surplus and reduce economic surplus to varying degrees. This market type is very common. There are various forms of imperfect competition such as pure monopoly which is the most inefficient market type. Other types are monopolistic competition, monopsony and oligopsony, and oligopoly which are more efficient than a monopoly. Imperfectly competitive firms have some control over price. The price may be greater than the cost of production and in the long-run the economic profits are possible. The essential difference between perfectly and imperfectly competitive firms is the perfectly competitive firm faces a perfectly elastic demand for its product which is represented as horizontal line at the market price. Also, the imperfectly competitive firm faces a downward-sloping demand curve. In perfect competition, the supply and demand determine the equilibrium price. The firm has no market power. At the equilibrium price, the firm sells all it wishes. Thus, with the imperfect competition, the firm has no control over price or market power. In addition, the firm faces a downward-sloping demand curve.
Nowadays, according to many aspects of labor markets considered as there is some degree of imperfect competition. We can assume that, if labor markets are perfectly competitive than an employer can find an employee who as productive as other workers which prevails market wage. So, the worker who quits the job will be quickly replaced by an identical worker who is paid the same wage. On the other hand, the employee who left the job can also find another job which paying the same wage. Thus, according to all these macroeconomic knowledge, I will try to understand US labor legislation and examine the advantages and disadvantages of the legislation.
Monospony in a Labor Market
In economics, a monopsony is one of the market forms, when only one buyer and many sellers.In microeconomic, in imperfect competition, the monopsonist is able to dictate conditions to its suppliers, as the monopsonist is the only purchaser of their services or goods. In other words, it is like “monopoly of a buyer”.
The standard monopsony model of the labor market refers to a partial static equilibrium in this market, when only one employer, and this employer pays an equal amount of money to all his workers. According to this model, the firm (as employer) facing a labor supply upward-sloping curve (it is generally contrasted with a labor supply curve in infinitely elasticity). The curve relates to the paid wage w, to the L, the employment level, is appears as increasing function w(L). Then, wLL will be the labor total costs. Now let’s make an assumption, the total revenue of a firm is R, and it increases, when L is increasing ( R=R(L)). The profit function is given by:
The monopsonist wants to choose L to maximize this function.
The first-order conditions gives us the following:
We have now the marginal revenue product of labor on the left hand (MRP), it represents the extra revenue, which produced by an extra empoyee. On the right hand of our equation is the marginal cost of labor (MC). It means the extra cost for an extra worker. Notice, that MC is above the w(L). This can be explained because the firm should make the payments of wage greater to all workers, when it hires an additional employee. Look at the graph, which illustrates the situation:
The first-order condition of profit maximizing is at point A, where MRP and MC curves intersect. A-point determines the L-value, profit-maximizing employment. The corresponding value of wage can be taken from the supply curve with the same L-coordinate (at point M).
The market equilibrium at point M now must be contrasted with competitive conditions equilibrium. Assume that a competitor (another employer) appeared on the market. He offers a wage, which is higher than at point M. Then, the workers of the previous employer would choose to work for with the new employer. Then, the competitor takes all first employer’s former profits, minus a compensation amount from the first employer’s employees wage increase, plus the profits from additional workers, who reacted on wage increase. The origin employer could respond with a greater wage, and so on, and so forth. We can say that the perfectly competitive groups, through competition, will be forced to intersection C rather than M. As a monopoly is failed to win sales by competition, maximizing output and minimizing prices, the competition for workers will maximize employment and wages (just as shown in the picture above).
Like in monopoly, wage discrimination has a place in a monopsony. A monopsonistic employer should find that its profits would be maximized if it discriminates employee wages. This means that employer will pay different wages to different worker groups even if their MRP is the same. The lower wages will be paid to those workers, who have a lower elasticity of their labor supply to the firm.
Oligopsony in a Labor Market
An oligopsony, in economic, is a marked form, when the number of buyers is small and the number of sellers is large. It contrasts with an oligopoly, where there are few sellers and many buyers. An oligopsony is also a form of imperfect competition.
Consider the demand on the labor of oligopsony, based on a sloping supply curve theory.
Assume that the following is true:
- There is no collusion between oligopsonists on labor market.
- A firm faces a competitive labor supply, which is not unionized and do not have market power
- The labor market is characterized by perfect mobility and information
The supply curve is shown in a figure below. If W0 is the current rate of wages, SL1 is a labor supply curve for oligopsonist under the assumption that none of the competitors do not react to any changes in wages, which makes an oligopsonist. SL2 is the labor supply curve, which will face oligopsonist, with assumptions, that competitiors are copying any changes in salaries committed to them. SL2 is more inelastic, than SL1
Initially, we consider the demand for labor in the situation where oligopsonist on a labor market does not have monopoly in the market of goods. The figure below shows a labor sloping supply curve to the point of fracture, with wage W0 and employment L0. The labor supply curve on interval (a,b) is relatively elastic and less elastic on the segment (b,c). It creates a gap in the marginal cost curve for labor (MCL). This labor market equilibrium is determined by the equality of the marginal cost of labor MCL and marginal of labor money product MRP1, with employment level L0 (or, more accurately, MRP1 passes through the gap in the MCL for a given level of employment). Any movement of the MRP curve between MRP1 and MRP2 has no impact on wage and employment levels. A consequence of this model is the wage rigidity and the employment level saving in periods of cyclical downturn.
In oligopsony situation on a labor market – an oligopoly in the product market (a figure below) the existence of wage rigidity is enhanced. Oligopolist in goods market faced with sloping demand curve for its product, has broken curve average product of labor and money, and a gap in labor marginal money product curve. The demand curve can now move within a certain range without affecting wages. This range will be determined by the demand curve upward movement with coincidence of point d with the point b. And the point a moves up and forms a point a’ (a’b=ad), and when the demand curve moves down, with coincidence of point a with point c, by moving the point d downward and form a point d’ (cd’=ad). The total value of the range of wage rigidity is a’d’=a’b+bc+cd’=2ad+bc. Wage rigidity is now even stronger, as the two gaps (in the marginal cost curve and in the curve of marginal money product) are superimposed on each other.
- Bhaskar, V., A. Manning and T. To (2002) Oligopsony and Monopsonistic Competition in Labor Markets, Journal of Economic Perspectives, 16, 155–174.
- Bhaskar, V. and T. To (2003) Oligopsony and the Distribution of Wages, European Economic Review, 47, 371-399.
- Atkinson, S.E.; Kerkvliet, J. (1989). Dual Measures of Monopoly and Monopsony Power: An Application to Regulated Electric Utilities. The Review of Economics and Statistics 71 (2): 250–257. doi:10.2307/1926970. JSTOR 1926970.
- Murray, B.C. (1995). Measuring Oligopsony Power with Shadow Prices: U.S. Markets for Pulpwood and Sawlogs. The Review of Economics and Statistics 77 (3): 486–98. doi:10.2307/2109909. JSTOR 2109909.
- Manning, A. (2003). Monopsony in Motion: Imperfect Competition in Labour Markets Princeton: Princeton Univ. Press.