A monopsony is a market where a single buyer faces a large number of suppliers. The situation is symmetrical with the more familiar monopoly that is synonumous with only one supplier facing many buyers.
This applies, for example in the field of industrial components: the imbalance is reversed and a specialized factory will have monopsony power against many suppliers of industrial components. Theoretically, the monopsony model defines a static partial equilibrium in a labor market with a single employer compensating a similar wage to all employees.
The result of monopsonistic power in the labor market is that wages fall below the equilibrium otherwise market hiring is enforced, resulting in a welfare loss. In some countries empirically observed effects of minimum wages, is captured with the standard neoclassical model as regards the weak labor market. And demonstrates the loss of jobs after the introduction of minimum wages within the expected range.
The consequence of monopsony is that, just as with a monopoly the only purchaser in a market may dictate conditions to the suppliers. The most common case falls within the area of arms purchases, there is indeed a buyer (the state) and many vendors.
The function of monopsony power from the perspective of anti-trust policy impacts vertical integrations. Some sections believe that vertical integration by a monopsony in which production becomes an in-house operation tends to diminish inefficiencies because of monopsonistic limitation of purchases.
In the United States, a number of firms such as Harper’s and the PBS program Frontline, alleged that Wal-Mart is a monopsonist, it dictates conditions to suppliers, and on the other hand, it is a monopolist in some market segments.
The less complicated account of monopsony power in labour markets relates to barriers to entry present on the demand side. Essentially, oligopsony results from oligopoly in relation to product markets of sectors which use labour as input.
As with a monopolist, a monopsonistic employer could realize that profits tend to be maximized whenever price discrimination is applied. Which ultimately translates to paying varying wages to different groups of employees, regardless of their MRP status. This involves paying less to the workers deemed to have lower labor elasticity supply to the company.
And this explanation has been taken further to exemplify some disparities which often occur when women are paid less than their male counterparts. Even though, statistics show that in the majority of cases females have a higher labor supply elasticity in comparison to men.