A monopsony operates in a market of one buyer and many sellers. Similar to a monopoly in many aspects, a monopsony dominates a market usually at the cost of consumer surplus in the form of lower wages and product-inefficient levels of production. Wal-Mart is considered by some to be a monopsony because its buying power in some instances dwarfs the remaining market.
The affects of monopsonies are most pronounced in the labor market. Company towns are a good example of a labor monopsony. The Pennsylvania towns of Hershey and Eckley are just two of hundreds of company towns that existed in coal country of Pennsylvania and West Virginia. These towns began as a result of a single large employer providing all necessary services to its workers in exchange for their labor.
Initially Sharpe, Weiss, & Co. was the only employer in the mining town of Eckley so wages didn’t have to be industry competitive. In fact, raising wages would have mobilized workers, allowing them to seek better living conditions outside of Eckley; therefore, employers had every incentive to keep wages low. Like monopolies though, monopsonies exist only in the short run, converting to competitive employers as more businesses move into the area and pressure the monopsony to raise wages and output to market levels. Free markets eventually will divide profit equally between buyer and seller, laborer and employer, and produce at maximum product-efficiency.
John Steinbeck explains monopsony well in the novel *In Dubious Battle. *During the Great Depression people were desperate for work. Large industries were cutting labor due to industrialization which was taking America by storm at the beginning of the Industrial Revolution. Farms were the only places people could find work and farm owners were able to cut wages drastically, knowing they would not lose their workforce. The workplaces were often isolated from merchant competition by distance and—as a result of poor living conditions and lack of transportation—workers were forced to buy staples from their employers at ridiculously inflated prices.
Steinbeck’s character Jim Nolan joins a radical group to start strikes opposing low wages and pitiful living conditions provided by farm owners. Nolan has a tough time of it, getting beaten repeatedly, and being thrown into a variety of extreme moral and ethical dilemmas, of which Steinbeck is supreme master. The farmers always won because of the economic factors in their favor and went on padding their pockets with gains made by keeping their workers poor. In the long run, of course—long after all concerned parties were dead—competition moved in and brought reform to the farms of this California valley.
Products and services in a monopolistic competitive market are differentiated by physical differences, location, accompanying services, and product image or taste. Consumers make choices based on these four attributes when choosing to purchase products and services from sellers. Similarly, sellers of labor or product choose their buyer using these same attributes. Medical doctors and surgeons enjoy high wages but many people choose not to be doctors because of their disdain for the education required to obtain this position or their dislike of the tasks and responsibilities of a doctor, thus raising wages along the demand curve.
Labor is usually sold to only one buyer at a time, that is, a person cannot supply a large number of buyers simultaneously with his or her labor. However, the laborer is able to change jobs at varying degrees of mobility depending on the occupation and locale. To retain workers typical firms compete with other firms by matching wages and benefits and adding a positive image that will discourage workers from changing firms as long as the economic value received by the seller of labor exceeds the costs of moving to another job even if the other job will increase accounting profit.
Monopsony still exists in businesses isolated from competition by locale, family structure, and belief systems. The family business, as the name states, is rooted firmly in the daily lives of the family. Members of the family business spread resources throughout personal and business areas, merging personal and business time, assets, and goodwill into an impenetrable conglomeration and accounting nightmare. Since businesses are valued in a large part by accounting principles necessary to determine if, how much, and when profit is derived from the business, family businesses can be difficult to value and sell. Sadly, few last longer than a generation or two.
Starting a business involves many expenses and much hard work. The business usually will not be profitable for several years due to scales of economy which exist in a competitive market. This loss to society could be avoided by careful planning concerning the perpetuity of the business. Planning for perpetuity increases the likelihood that a business will exist long into the future and eliminates societal loss realized when each new generation starts a new business. Establishing a corporate entity separates assets and liabilities from family, making a business that is worth keeping intact much longer than a generation. A formal structure with a named board of directors exposes important decisions to an important variety of perspectives.
Having a plan for succession of leadership from the first day provides a solid sense of direction for the company. Hiring employees on industry-competitive terms greatly simplifies accounting and profit measuring and lowers contingent liability of business audits and suits. Free choice of employment enables levels of efficiency, longevity, and sustainability not present in monopsonies. It goes without saying that higher levels of efficiency and better sense of direction lead to better wages and more productive happier employees, who then bring greater profit and reputation to the company.