Monopsony

In economics, a monopsony (from Ancient Greek μόνος (mónos) "single" + ὀψωνία (opsōnía) "purchase") is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers. In the microeconomic theory of monopsony, a single entity is assumed to have market power over sellers as the only purchaser of a good or service, much in the same manner that a monopolist can influence the price for its buyers in a monopoly, in which only one seller faces many buyers.

History

Monopsony theory was developed by economist Joan Robinson in her book The Economics of Imperfect Competition (1933). Economists use the term "monopsony power" in a manner similar to "monopoly power" as a shorthand reference for a scenario in which there is one dominant power in the buying relationship, so that power is able to set prices to maximize profits not subject to competitive constraints. Monopsony power exists when one buyer faces little competition from other buyers for that labour or good, so they are able to set wages and prices for the labour or goods they are buying at a level lower than would be the case in a competitive market. A classic theoretical example is a mining town, where the company that owns the mine is able to set wages low since they face no competition from other employers in hiring workers, because they are the only employer in the town, and geographic isolation or obstacles prevent workers from seeking employment in other locations. Other more current examples may include school districts where teachers have little mobility across districts. In such cases the district faces little competition from other schools in hiring teachers, giving the district increased power when negotiating employment terms.[1] Alternative terms are oligopsony or monopsonistic competition.

Etymology

The term was first introduced by Joan Robinson in her influential[2] book, The Economics of Imperfect Competition, published in 1933. Robinson credited classics scholar Bertrand Hallward at the University of Cambridge with coining the term.[3]

Static monopsony in a labour market

Monopsony-static-partial-equilibrium
A monopsonist employer maximizes profits by choosing the employment level L, that equates the marginal revenue product (MRP) to the marginal cost MC, at point A. The wage is then determined on the labour supply curve, at point M, and is equal to w. By contrast, a competitive labour market would reach equilibrium at point C, where labour supply S  equals demand. This would lead to employment L'  and wage w'.

The standard textbook monopsony model of a labour market is a static partial equilibrium model with just one employer who pays the same wage to all the workers. The employer faces an upward-sloping labour supply curve (as generally contrasted with an infinitely elastic labour supply curve), represented by the S blue curve in the diagram on the right. This curve relates the wage paid, , to the level of employment, , and is denoted as an increasing function . Total labour costs are given by . The firm has total revenue , which increases with . The firm wants to choose to maximize profit, , which is given by:

.

At the maximum profit , so the first-order condition for maximization is

where is the derivative of the function implying

The left-hand side of this expression, , is the marginal revenue product of labour (roughly, the extra revenue generated by an extra worker) and is represented by the red MRP curve in the diagram. The right-hand side is the marginal cost of labour (roughly, the extra cost due to an extra worker) and is represented by the green MC curve in the diagram. Notably, the marginal cost is higher than the wage paid to the new worker by the amount

.

This is because, by assumption, the firm has to increase the wage paid to all the workers it already employs whenever it hires an extra worker. In the diagram, this leads to an MC curve that is above the labour supply curve S.

The first-order condition for maximum profit is then satisfied at point A of the diagram, where the MC and MRP  curves intersect. This determines the profit-maximizing employment as L on the horizontal axis. The corresponding wage w is then obtained from the supply curve, through point M.

The monopsonistic equilibrium at M can be contrasted with the equilibrium that would obtain under competitive conditions. Suppose a competitive employer entered the market and offered a wage higher than that at M. Then every employee of the first employer would choose instead to work for the competitor. Moreover, the competitor would gain all the former profits of the first employer, minus a less-than-offsetting amount from the wage increase of the first employer's employees, plus profit arising from additional employees who decided to work in the market because of the wage increase. But the first employer would respond by offering an even higher wage, poaching the new rival's employees, and so forth. As a result, a group of perfectly competitive firms would be forced, through competition, to intersection C rather than M. Just as a monopoly is thwarted by the competition to win sales, minimizing prices and maximizing output, competition for employees between the employers in this case would maximize both wages and employment.

Welfare implications

Monopsony-welfare-effects
The grey rectangle is a measure of the amount of economic welfare transferred from the workers to their employer(s) by monopsony power. The yellow triangle shows the overall deadweight loss inflicted on both groups by the monopsonistic restriction of employment. It is thus a measure of the market failure caused by monopsony.

The lower employment and wages caused by monopsony power have two distinct effects on the economic welfare of the people involved. First, it redistributes welfare away from workers and to their employer(s). Secondly, it reduces the aggregate (or social) welfare enjoyed by both groups taken together, as the employers' net gain is smaller than the loss inflicted on workers.

The diagram on the right illustrates both effects, using the standard approach based on the notion of economic surplus. According to this notion, the workers' economic surplus (or net gain from the exchange) is given by the area between the S curve and the horizontal line corresponding to the wage, up to the employment level. Similarly, the employers' surplus is the area between the horizontal line corresponding to the wage and the MRP curve, up to the employment level. The social surplus is then the sum of these two areas.

Following such definitions, the grey rectangle, in the diagram, is the part of the competitive social surplus that has been redistributed from the workers to their employer(s) under monopsony. By contrast, the yellow triangle is the part of the competitive social surplus that has been lost by both parties, as a result of the monopsonistic restriction of employment. This is a net social loss and is called deadweight loss. It is a measure of the market failure caused by monopsony power, through a wasteful misallocation of resources.

As the diagram suggests, the size of both effects increases with the difference between the marginal revenue product MRP and the market wage determined on the supply curve S. This difference corresponds to the vertical side of the yellow triangle, and can be expressed as a proportion of the market wage, according to the formula:

.

The ratio has been called the rate of exploitation, and it can be easily shown that it equals the reciprocal of the elasticity of the labour supply curve faced by the firm. Thus the rate of exploitation is zero under competitive conditions, when this elasticity tends to infinity. Empirical estimates of by various means are a common feature of the applied literature devoted to the measurement of observed monopsony power.

Finally, it is important to notice that, while the gray-area redistribution effect could be reversed by fiscal policy (i.e., taxing employers and transferring the tax revenue to the workers), this is not so for the yellow-area deadweight loss. The market failure can only be addressed in one of two ways: either by breaking up the monopsony through anti-trust intervention, or by regulating the wage policy of firms. The most common kind of regulation is a binding minimum wage higher than the monopsonistic wage.

Minimum wage

Monopsony-minimum-wage
With a binding minimum wage of w' the marginal cost to the firm becomes the horizontal black MC'  line, and the firm maximises profits (which it can do due to a lack of competition) at A with a higher employment L''. However, in this example, the minimum wage is higher than the competitive one, leading to involuntary unemployment equal to the segment AB.

A binding minimum wage can be introduced either directly by law or through collective bargaining laws requiring union membership. While it is generally agreed that minimum wage price floors reduce employment[4], in the presence of monopsony power within the labour market the effect is reversed and a minimum wage could increase employment.

This effect is demonstrated in the diagram on the right.

Here the minimum wage is w'', higher than the monopsonistic w. Because of the binding effects of minimum wage and the excess supply of labour (as defined by the monopsony status), the marginal cost of labour for the firm becomes constant (the price of hiring an additional worker rather than the increasing cost as labour becomes more scarce)[5]. This means that the firm maximizes profit at the intersection of the new marginal cost line (MC' in the diagram) and Marginal Revenue Product line (the additional revenue for selling one more unit)[6]. This is the point where it becomes more expensive to produce an additional item than is earned in revenue from selling that item.

This condition is still inefficient compared to a competitive market. The line segment represented by A-B shows that there are still workers who would like to find a job, but cannot due to the monopsonistic nature of this industry. This would represent the unemployment rate for this industry. This illustrates the there will be deadweight loss in a monoposonistic labour environment regardless of minimum wage levels, however a minimum wage law can increase total employment within the industry.


More generally, a binding minimum wage modifies the form of the supply curve faced by the firm, which becomes:

where is the original supply curve and is the minimum wage. The new curve has thus a horizontal first branch and a kink at the point

as is shown in the diagram by the kinked black curve MC' S (the black curve to the right of point B). The resulting equilibria (the profit-maximizing choices that rational companies will make) can then fall into one of three classes according to the value taken by the minimum wage, as shown by the following table:

Profit Maximizing Choice In A Monopsonistic Labour Market Depends Upon The Minimum Wage Level
Minimum Wage Resulting Equilibrium
First Case < than monopsony wage where the monopsony wage intersects the supply curve (S)
Second Case > monopsony wage
but
≤ than competitive wage (the intersection of S and MRP)
at the intersection of the minimum wage and the supply curve (S)
Third Case > competitive wage at intersection where minimum wage equals MRP

Yet, even when it is sub-optimal, a minimum wage higher than the monopsonistic rate raises the level of employment anyway. This is a highly remarkable result because it only follows under monopsony. Indeed, under competitive conditions any minimum wage higher than the market rate would actually reduce employment, according to classical economic models and the consensus of peer-reviewed work[4]. Thus, spotting the effects on employment of newly introduced minimum wage regulations is among the indirect ways economists use to pin down monopsony power in selected labour markets. This technique was used, for example in a series of studies looking at the American labour market that found monopsonies existed only in several specialized fields such as professional sports and college professors[7][8].

Wage discrimination

Just like a monopolist, a monopsonistic employer may find that its profits are maximized if it discriminates prices. In this case this means paying different wages to different groups of workers even if their MRP is the same, with lower wages paid to the workers who have a lower elasticity of supply of their labour to the firm.

Researchers have used this fact to explain at least part of the observed wage differentials whereby women often earn less than men, even after controlling for observed productivity differentials. Robinson's original application of monopsony (1938) was developed to explain wage differentials between equally productive women and men.[9] Ransom and Oaxaca (2004) found that women's wage elasticity is lower than that of men for employees at a grocery store chain in Missouri, controlling for other factors typically associated with wage determination.[10] Ransom and Lambson (2011) found that female teachers are paid less than male teachers due to differences in labour market mobility constraints facing women and men.[11]

Some authors have argued informally that, while this is so for market supply, the reverse may somehow be true of the supply to individual firms. In particular, Manning and others have shown that, in the case of the UK Equal Pay Act, implementation has led to higher employment of women. Since the Act was effectively minimum wage legislation for women, this might perhaps be interpreted as a symptom of monopsonistic discrimination.

Empirical problems

The simpler explanation of monopsony power in labour markets is barriers to entry on the demand side. Such barriers to entry would result in a limited number of companies competing for labour (oligopsony). If the hypothesis was generally true, one would expect to find that wages decreased as firm size increased or, more accurately, as industry concentration increased. However, numerous statistical studies document significant positive correlations between firm or establishment size and wages. These results are often explained as being the result of cross-industry competition. For example, if there were only one fast food producer, that industry would be very consolidated. But that company wouldn't be able to drive down wages via monopsonistic power if it were also competing against retail stores, construction, and other jobs utilizing the same labour skill set. This finding is both intuitive (low-skilled labour can move more fluidly through different industries) and supported by the data which found that monopsony effects are limited to professional sports, and perhaps nursing, fields where skill sets limit moving to comparably paid other industries. [7]

However, monopsony power might also be due to circumstances affecting entry of workers on the supply side (like in the referenced case above), directly reducing the elasticity of labour supply to firms. Paramount among these are industry accreditation or licensing fees, regulatory constraints, training or education requirements, and the institutional factors that limit labour mobility between firms, including job protection legislation.

An alternative that has been suggested as a source of monopsony power is worker preferences over job characteristics. [12][13] Such job characteristics can include distance from work, type of work, location, the social environment at work, etc. If different workers have different preferences, employers could have local monopsony power over workers that strongly prefer working for them.

Empirical evidence of monopsony power has been relatively limited. In line with the considerations discussed above, but perhaps counter to common intuition, there is no observable monopsony power in low-skilled labour markets in the US.[7] Though there has been at least one study finding monopsony power in Indonesia due to barriers to entry in developing countries. [14] Several studies expanding their view for monopsony power have found economic and labor mobility in the US precludes any detectable monopsony effects [15] with the notable exceptions of professional sports[7] and (with some disagreement [16]) nursing. [17][18] Both of these industries have highly specialized labor conditions and are generally not substitutable.

See also

References

  1. ^ [1], more text.
  2. ^ Kerr, Prue; Harcourt, Geoff (2002). Joan Robinson: Critical Assessments of Leading Economists. Taylor & Francis. pp. 2–3. ISBN 978-0-415-21743-9
  3. ^ Thornton, Rupert J. (2004). "Retrospectives: How Joan Robinson and B. L. Hallward Named Monopsony". Journal of Economic Perspectives. 18 (2): 257–261. doi:10.1257/0895330041371240.
  4. ^ a b "Minimum Wage Effects in the Post-welfare Reform Era" (PDF). 2007. Archived (PDF) from the original on 2018-05-06.
  5. ^ "The Minimum Wage and Monopsony". The Library of Economics and Liberty. 2015. Archived from the original on 2018-02-13.
  6. ^ "The Minimum Wage and Monopsony". The Library of Economics and Liberty. 2013. Archived from the original on 2018-02-13.
  7. ^ a b c d "Monopsony in American Labor Markets". 2017. Archived from the original on 2018-03-19.
  8. ^ "Is There Monopsony in the Labor Market? Evidence from a Natural Experiment" (PDF). 2010. Archived (PDF) from the original on 2017-08-09.
  9. ^ "Archived copy" (PDF). Archived (PDF) from the original on 2014-02-03. Retrieved 2014-02-01.CS1 maint: Archived copy as title (link)
  10. ^ http://dataspace.princeton.edu/jspui/bitstream/88435/dsp01nk322d34x/1/540.pdf
  11. ^ Ransom, Michael R.; Lambson, Val Eugene (2011). "Monopsony, mobility, and sex differences in pay : Missouri school teachers". Econbiz.de. The American economic review. - Nashville, Tenn : American Economic Assoc, ISSN 0002-8282, ZDB-ID 203590-x. - Vol. 101.2011, 3, p. 454-459. 101 (3). Archived from the original on 2014-02-03.
  12. ^ Bhaskar, V. To, Ted (2001). "Minimum Wages for Ronald McDonald Monopsonies: a Theory of Monopsonistic Competition". The Economic Journal. 109 (455): 190–203. CiteSeerX 10.1.1.195.6646. doi:10.1111/1468-0297.00427.CS1 maint: Multiple names: authors list (link)
  13. ^ V. Bhaskar, Alan Manning and Ted To (2002). "Oligopsony and Monopsonistic Competition in Labor Markets". Journal of Economic Perspectives. 16 (2): 155–274. doi:10.1257/0895330027300.
  14. ^ Brummond, Peter (2010). "Evidence of Monopsony in the Labor Market of a Developing Country" (PDF). Cornell University. Archived (PDF) from the original on 2018-04-05.
  15. ^ Samuel Muehlemann, Paul Ryan, Stefan C. Wolter (2013). "Monopsony Power, Pay Structure and Training". Industrial and Labor Relations Review. 66 (5): 1097–1114. doi:10.1177/001979391306600504. hdl:10419/51865. Archived from the original on 2018-04-05.CS1 maint: Multiple names: authors list (link)
  16. ^ Douglas O. Staiger, Joanne Spetz, Ciaran S. Phibbs (2010). "Is There Monopsony in the Labor Market? Evidence from a Natural Experiment" (PDF). Journal of Labor Economics. 28 (2): 211–236. CiteSeerX 10.1.1.713.2114. doi:10.1086/652734. Archived (PDF) from the original on 2017-08-09.CS1 maint: Multiple names: authors list (link)
  17. ^ Barry Hirsch, Edward J. Schumacher (1995). "Monopsony Power and Relative Wages in the Labor Market for Nurses" (PDF). Journal of Health Economics. 14 (4): 443–476. doi:10.1016/0167-6296(95)00013-8. Archived (PDF) from the original on 2017-08-10.
  18. ^ Barry T. Hirsch, Edward J. Schumacher (2005). "Classic or New Monopsony? Searching for Evidence in Nursing Labor Markets". Health Care Administration Faculty Research. 24 (5): 969–989. doi:10.1016/j.jhealeco.2005.03.006. Archived from the original on 2015-09-10.

Further reading

  • 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.
  • Bhaskar, V.; To, T. (1999). "Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonistic Competition". The Economic Journal. 109 (455): 190–203. CiteSeerX 10.1.1.195.6646. doi:10.1111/1468-0297.00427.
  • Bhaskar, V.; Manning, A.; To, T. (2002). "Oligopsony and Monopsonistic Competition in Labor Markets". Journal of Economic Perspectives. 16 (2): 155–174. doi:10.1257/0895330027300.
  • Boal, W.M. (1995). "Testing for Employer Monopsony in Turn-of-the-Century Coal Mining". The RAND Journal of Economics. 26 (3): 519–36. doi:10.2307/2556001. JSTOR 2556001.
  • Boal, W.M.; Ransom, M.R. (1997). "Monopsony in the Labor Market". Journal of Economic Literature. 35 (1): 86–112.
  • Just, R.E.; Chern, W.S. (1980). "Tomatoes, Technology, and Oligopsony". The Bell Journal of Economics. 11 (2): 584–602. doi:10.2307/3003381. JSTOR 3003381.
  • Lynn, Barry C (July 2006). "Breaking the Chain: The antitrust case against Wal-Mart". Harper's Magazine.
  • Manning, A. (2003). Monopsony in Motion: Imperfect Competition in Labour Markets Princeton: Princeton Univ. Press.
  • 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.
  • Robinson, J. (1933). The Economics of Imperfect Competition London: Macmillan.
  • Rodriguez, C.A. (1975). "Trade in Technological Knowledge and the National Advantage". The Journal of Political Economy. 83 (1): 121–36. doi:10.1086/260309.
  • Schroeter, J.R. (1988). "Estimating the Degree of Market Power in the Beef Packing Industry". The Review of Economics and Statistics. 70 (1): 158–62. doi:10.2307/1928165. JSTOR 1928165.

External links

Addamax

Addamax was an American software company that developed Trusted operating systems based on UNIX System V and Berkeley Software Distribution (BSD) variants of UNIX. The company was founded in 1986 in Champaign, Illinois by Dr. Peter A. Alsberg and had a sales and development office in Gaithersburg, Maryland.

Addamax filed a high-profile anti-trust lawsuit in 1991 against the Open Software Foundation (OSF), alleging that OSF created a cartel that controlled the UNIX operating system and exerted monopsony price fixing and led to the company going out of business.

Alan Manning

Alan Manning (born 1960) is a British economist and professor of economics at the London School of Economics. Manning is one of the leading labour economists in Europe, having made major contributions to e.g. the analysis of the imperfections of labour markets.

Bargaining power

Bargaining power is the relative power of parties in a situation to exert influence over each other. If both parties are on an equal footing in a debate, then they will have equal bargaining power, such as in a perfectly competitive market, or between an evenly matched monopoly and monopsony.

There are a number of fields where the concept of bargaining power has proven crucial to coherent analysis: game theory, labour economics, collective bargaining arrangements, diplomatic negotiations, settlement of litigation, the price of insurance, and any negotiation in general.

Bilateral monopoly

A bilateral monopoly is a market structure consisting of both a monopoly (a single seller) and a monopsony (a single buyer).

Causes of the May Revolution

The May Revolution (Spanish: Revolución de Mayo) was a series of revolutionary political and social events that took place during the early nineteenth century in the city of Buenos Aires, capital of the Viceroyalty of the Río de la Plata, a colony of the Spanish Crown which at the time contained the present-day nations of Argentina, Bolivia, Paraguay and Uruguay. The consequence of the revolution was that the head of the Viceroyalty, Viceroy Cisneros, was ousted from office, and role of government was assumed by the Primera Junta. There are many reasons, both local and international, that promoted such developments.

Chamberlinian monopolistic competition

In Chamberlinian monopolistic competition every one of the firms have some monopoly power, but entry drives monopoly profits to zero. The concept gets its name from Edward Chamberlin.

One example where Chamberlinian monopolistic competition can be experienced is the book market. A publisher has a factual monopoly over certain titles via intellectual property rights. A book is an experience good and finding perfect legal substitutes on the market while the publisher's rights are in effect is impossible. This however doesn't lead to high monopoly profits on any particular titles while close substitutes are available. A best-seller cookbook for Asian cuisine still competes with other cookbooks about Asian cuisine as well as the whole cookbook genre.Chamberlain's approach to monopoly theory is often compared to Joan Robinson's 1933 book The Economics of Imperfect Competition, where she coined the term "monopsony." Monopsony is used to describe the buyer converse of a seller monopoly. Monopsony is commonly applied to buyers of labour, where the employer has wage setting power that allows it to exercise Pigouvian exploitation and pay workers less than their marginal productivity. Robinson used monopsony to describe the wage gap between women and men workers of equal productivity.

Economic cost

Economic cost is the combination losses of any goods that have a value attached to them by any one individual. Economic cost is used mainly by economists as means to compare the prudence of one course of action with that of another. The goods to be taken into consideration are e.g. money, time and resources.

The comparison includes the gains and losses precluded by taking a course of action, as those of the course taken itself. Economic cost differs from accounting cost because it includes opportunity cost.

Edward Chamberlin

Edward Hastings Chamberlin (May 18, 1899 – July 16, 1967) was an American economist. He was born in La Conner, Washington, and died in Cambridge, Massachusetts.

Chamberlin studied first at the University of Iowa (where he was influenced by Frank H. Knight), then pursued graduate-level studies at the University of Michigan, eventually receiving his Ph.D. from Harvard University in 1927.

Imperfect competition

In economic theory, imperfect competition is a type of market structure showing some but not all features of competitive markets.Forms of imperfect competition include:

Monopolistic competition: A situation in which many firms with slightly different products compete. Production costs are above what may be achieved by perfectly competitive firms, but society benefits from the product differentiation.

Monopoly: A firm with no competitors in its industry. A monopoly firm produces less output, has higher costs, and sells its output for a higher price than it would if constrained by competition. These negative outcomes usually generate government regulation.

Oligopoly: An industry with only a few firms. If they collude, they form a cartel to reduce output and drive up profits the way a monopoly does.

Duopoly: A special form of Oligopoly, with only two firms in an industry.

Monopsony: A market with a single buyer and many sellers.

Oligopsony: A market with a few buyers and many sellers.

Joan Robinson

Joan Violet Robinson (née Maurice; 31 October 1903 – 5 August 1983) was a British economist well known for her wide-ranging contributions to economic theory. She was a central figure in what became known as post-Keynesian economics.

Labour economics

Labour economics seeks to understand the functioning and dynamics of the markets for wage labour.

Labour markets or job markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers) and the demanders of labour services (employers), and attempts to understand the resulting pattern of wages, employment, and income.

Labour is a measure of the work done by human beings. It is conventionally contrasted with such other factors of production as land and capital. Some theories focus on human capital (referring to the skills that workers possess, not necessarily their actual work).

Market power

In economics and particularly in industrial organization, market power is the ability of a firm to profitably raise the market price of a good or service over marginal cost. In perfectly competitive markets, market participants have no market power. A firm with total market power can raise prices without losing any customers to competitors. Market participants that have market power are therefore sometimes referred to as "price makers" or "price setters", while those without are sometimes called "price takers". Significant market power occurs when prices exceed marginal cost and long run average cost, so the firm makes economic profit.

A firm with market power has the ability to individually affect either the total quantity or the prevailing price in the market. Price makers face a downward-sloping demand curve, such that price increases lead to a lower quantity demanded. The decrease in supply as a result of the exercise of market power creates an economic deadweight loss which is often viewed as socially undesirable. As a result, many countries have anti-trust or other legislation intended to limit the ability of firms to accrue market power. Such legislation often regulates mergers and sometimes introduces a judicial power to compel divestiture.

A firm usually has market power by virtue of controlling a large portion of the market. In extreme cases—monopoly and monopsony—the firm controls the entire market. However, market size alone is not the only indicator of market power. Highly concentrated markets may be contestable if there are no barriers to entry or exit, limiting the incumbent firm's ability to raise its price above competitive levels.

Market power gives firms the ability to engage in unilateral anti-competitive behavior. Some of the behaviours that firms with market power are accused of engaging in include predatory pricing, product tying, and creation of overcapacity or other barriers to entry. Unilateral market power is one of the most common causes of prices being higher than the competitive equilibrium. Market power has been seen to exert more upward pressure on prices than do variations in the quantity of sellers present in the market. This is due to effects relating to Nash equilibria and profitable deviations that can be made by raising prices.If no individual participant in the market has significant market power, then anti-competitive behavior can take place only through collusion, or the exercise of a group of participants' collective market power.

The Lerner index and Herfindahl index may be used to measure market power.

Microeconomics

Microeconomics (from Greek prefix mikro- meaning "small" + economics) is a branch of economics that studies the behaviour of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.One goal of microeconomics is to analyze the market mechanisms that establish relative prices among goods and services and allocate limited resources among alternative uses. Microeconomics shows conditions under which free markets lead to desirable allocations. It also analyzes market failure, where markets fail to produce efficient results.

Microeconomics stands in contrast to macroeconomics, which involves "the sum total of economic activity, dealing with the issues of growth, inflation, and unemployment and with national policies relating to these issues". Microeconomics also deals with the effects of economic policies (such as changing taxation levels) on microeconomic behavior and thus on the aforementioned aspects of the economy. Particularly in the wake of the Lucas critique, much of modern macroeconomic theories has been built upon microfoundations—i.e. based upon basic assumptions about micro-level behavior.

Minimum wage

A minimum wage is the lowest remuneration that employers can legally pay their workers—the price floor below which workers may not sell their labor. Most countries had introduced minimum wage legislation by the end of the 20th century.Supply and demand models suggest that there may be welfare and employment losses from minimum wages. However, if the labor market is in a state of monopsony (with only one employer available who is hiring), minimum wages can increase the efficiency of the market. There is debate about the full effects of minimum wages.The movement for minimum wages was first motivated as a way to stop the exploitation of workers in sweatshops, by employers who were thought to have unfair bargaining power over them. Over time, minimum wages came to be seen as a way to help lower-income families. Modern national laws enforcing compulsory union membership which prescribed minimum wages for their members were first passed in New Zealand and Australia in the 1890s.

Although minimum wage laws are in effect in many jurisdictions, differences of opinion exist about the benefits and drawbacks of a minimum wage. Supporters of the minimum wage say it increases the standard of living of workers, reduces poverty, reduces inequality, and boosts morale. In contrast, opponents of the minimum wage say it increases poverty, increases unemployment (particularly among unskilled or inexperienced workers) and is damaging to businesses, because excessively high minimum wages require businesses to raise the prices of their product or service to accommodate the extra expense of paying a higher wage and some low-wage workers "will be unable to find work...[and] will be pushed into the ranks of the unemployed."

Monopoly

A monopoly (from Greek μόνος, mónos, 'single, alone' and πωλεῖν, pōleîn, 'to sell') exists when a specific person or enterprise is the only supplier of a particular commodity. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly which consists of a few sellers dominating a market. Monopolies are thus characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry (or market).A monopoly is distinguished from a monopsony, in which there is only one buyer of a product or service; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations in which one or a few entities have market power and therefore interact with their customers (monopoly or oligopoly), or suppliers (monopsony) in ways that distort the market.Monopolies can be established by a government, form naturally, or form by integration.

In many jurisdictions, competition laws restrict monopolies. Holding a dominant position or a monopoly in a market is often not illegal in itself, however certain categories of behavior can be considered abusive and therefore incur legal sanctions when business is dominant. A government-granted monopoly or legal monopoly, by contrast, is sanctioned by the state, often to provide an incentive to invest in a risky venture or enrich a domestic interest group. Patents, copyrights, and trademarks are sometimes used as examples of government-granted monopolies. The government may also reserve the venture for itself, thus forming a government monopoly.Monopolies may be naturally occurring due to limited competition because the industry is resource intensive and requires substantial costs to operate.

Oligopsony

An oligopsony (from Ancient Greek ὀλίγοι (oligoi) "few" + ὀψωνία (opsōnia) "purchase") is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in a market for inputs where numerous suppliers are competing to sell their product to a small number of (often large and powerful) buyers. It contrasts with an oligopoly, where there are many buyers but few sellers. An oligopsony is a form of imperfect competition.

The terms monopoly (one seller), monopsony (one buyer), and bilateral monopoly have a similar relationship.

Scarcity

Scarcity is the limited availability of a commodity, which may be in demand in the market or by the commons. Scarcity also includes an individual's lack of resources to buy commodities.

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