1. EA Session 21: August 24, 2007 1

2. Overview Factor Markets with Monopsony Power
Factor Markets with Monopoly Power
Wage discrimination across unionized & non-unionized labor (optional)
Bilateral Monopoly (monopolist seller of labor facing a monopsonist buyer)
The Decline of Private Sector Unionism in USA 2

3. Factor Markets with Monopsony Power
Assume
The output market is perfectly competitive.
Input market is pure monopsony.
Monopsonist forcing wage determination on seller’s supply curve,i.e., forcing labor to get only its minimum supply price.
Examples of Monopsony Power
Government
Soldiers
Missiles
B2 Bombers
NASA
Astronauts
Company town

4. Why is marginal expenditure
Marginal and Average Expenditure under monopsony (typology 3: Competitive seller)
SL = Average
Expenditure (AE)
Marginal
Expenditure (ME)
Why is marginal expenditure
greater than SL?
Price
(per unit
of input) 20
D = VMPL wc Lc C
wM = 13 LM 15 WM 10
Extent of monopsonistic
exploitation 5
WM< WC
LM< LC 1 2 3 4 5 6
Units of Input

5. Why is marginal expenditure
Marginal and Average Expenditure under monopsony (typology 4: monopolist seller)
SL = Average
Expenditure (AE)
Marginal
Expenditure (ME)
Why is marginal expenditure
greater than SL?
Price
(per unit
of input) 20
D = VMPL wc Lc C
WM = 13 L* 15
WMM 10
Extent of
exploitation
M=monopsonist
MM=monopolist
cum monopsonist
WMM< WM
LMM< LM 5
D=MPL.MR
LMM LM 1 2 3 4 5 6
Units of Input

6. Factor Markets with Monopoly Power & Alternative Objectives of Unions
Just as buyers of inputs can have monopsony power, sellers of inputs can have monopoly power.
The most important example of monopoly power in factor markets involves labor unions.
Unions have one of the following three objectives
Maximizing wage rate (WM, LM), M=monopoly situation;
Maximizing wage bill (W2, L2);
Maximizing employment (WC, LC); C=competitive situation

7. Monopoly Power of Sellers of Labor (typology 5)
Economic
Rent w1 L1
The quantity of labor L1 that maximizes
the rent that employees earn is determined
by the intersection of the marginal revenue
and supply or labor curves; union members
receive a wage rate of w1.
Wage
per
worker L2 w2
Finally, if the union wishes to maximize total
wages paid to workers, it should allow L2
union members to be employed at a wage
rate of w2 because the marginal revenue
to the union will then be zero. C
WM= B SL A
WC= w*
WM> WC
LM< LC
Note exploitation of
labor=0 at A, B, C DL MR
LM=
LC= L*
Number of Workers

8. Monopoly Power of Sellers of Labor coupled with Producer Monopoly Power (typology 6)
Economic
Rent w1 L1
M=only monopolist seller of labor,
indicated by points A, B, C
Wage
per
worker L2 w2
MM=monopolist seller of labor
facing monopolist producer,
Indicated by points A’, B’, C’ C
WM= C’
WMM B B’ SL A
WC= w* A’
WMM< WM
LMM< LM DL
D’L for monopolist
LMM
=LM L*
Number of Workers
MR’ MR

9. Implications of monopoly sale of labor
Seller of labor forcing wage determination along the demand curve of labor (i.e., trying to realize the full demand price of labor), depending upon whether the seller of product is a competitor (demand for labor being VMPL) or a monopolist (demand for labor being MRPL)

10. Factor Markets with Monopoly Power
A Two-Sector Model of Labor Employment
Union monopoly power impacts the non-unionized part of the economy.

11. Additional wage bill due to union
Wage Determination/discrimination in Unionized and Non-unionized Sectors (optional)
D is total demand for labor, assuming that both union and non-union labor are physically identical
DU is demand for union labor, which - due to the union activities - takes precedence over demand for non-union labor
LC is total labor employed (sum of union i.e. LU and non-union labor i.e. LC - LU)
D’D is the portion of total labor demand that has to be satisfied by non-union labor
Additional wage bill due to union D’
To see how union monopoly
power impacts the non-
unionized part of the
economy WU
MCU WC
MCNU D LU LC DU
MRU

12. Bilateral Monopoly: Market in which a Monopolist seller (MP) of labor sells to a Monopsonist buyer (MS) of labor (typology 7)
Wage
per
worker
SL = AE ME 25
DL = VMPL MR 20
WMP= 25 19
Wage
Possibilities wC 15
WMS= 10 5
Number
of Workers 10 20 40

13. Implications of Bilateral Monopoly for Wages
Monopolist seller of labor will try to set wage rate at WMP.
Monopsonist buyer of labor will try to set wage rate at WMS.
Depending upon the relative bargaining power of the buyer and seller of labor, the wage rate will lie between these two extremes.

14. Bilateral Monopoly: Market in which a Monopolist Factor Supplier sells to a Monopsonist cum Monopolist (typology 8)
Wage
per
worker
W’MP< WMP
L’MP< LMP
SL = AE ME 25
DL = VMPL
DL’=MRPL 20
WMP= 25 19
W’MS< WMS
L’MS< LMS
Wage
Possibilities
W’MP wC 15
WMS= 10
W’MS
LMS 5
LMP
Number
of Workers 10 20 40
L’MP
L’MS
MR’L

15. Who will win under Bilateral Monopoly?
The union will win if its threat to strike is credible.
The firm will win if its threat to hire non-union workers is credible.
If both make credible threats, the wage will be at Wc.

16. The Decline of Private Sector Unionism in USA
Observations
Union membership and monopoly power has been declining.
Initially, during the 1970’s, union wages relative to non-union wages fell.
In the 1980’s union wages stabilized relative to non-union wages.
In the 1990’s membership has been falling and wage differential has remained stable.
Explanations
The unions have been attempting to maximize the individual wage rate instead of total wages paid.
The demand for unionized employees has probably become increasingly elastic as firms find it easier to substitute capital for skilled labor.