Monopsony

The big picture

Monopsony is the course's central market-failure story for low pay. A dominant employer does not take the wage from the market; it sets the wage, and it profits by setting it below the marginal revenue product of the workers it hires. The employer keeps the gap, so monopsony shifts the surplus a business generates away from labour and towards capital. That makes it a live answer to the question running through the whole of Theme 3: who gets what, and who has the power to decide?

The power does not require a literal sole employer. It requires workers who cannot easily move to alternatives, which is why monopsony and labour immobility travel together: a supermarket with rivals across town still holds wage-setting power over staff whose family ties, hours and skills tie them to it. The same logic runs in product markets when a dominant buyer squeezes its suppliers, as supermarkets do to farmers and as Amazon does to publishers. Where the employer is dominant rather than sole, the precise term is oligopsony; the mechanics are the same.

The theory

The mechanics turn on one insight. A monopsonist faces the whole upward-sloping labour supply curve, which is also its average cost of labour: each point shows the wage needed to attract that many workers. To hire one more worker it must offer a higher wage, and (with a single going rate) pay that higher wage to everyone already employed. The cost of the extra worker is therefore the new wage plus the rise for all existing staff, so the marginal cost of labour lies above the supply curve and rises more steeply. A profit-maximising monopsonist hires up to the point where the marginal cost of labour equals MRP, then pays the wage on the supply curve at that employment level. Both results are below the competitive benchmark: the wage sits below MRP and below W_c, and employment sits below L_c. Workers are underpaid and there are too few of them, a deadweight loss with two blades.

The same diagram, relabelled, covers a monopsonist buyer of goods: an upward-sloping supply of the product, a marginal cost of purchasing above it, and a purchase price on the supply curve below the competitive level. Squeezed suppliers respond the way squeezed workers do, by cutting investment, cutting quality, or leaving the market.

What curbs the power? Countervailing power. A union bargaining collectively turns the market into a bilateral monopoly and can push the wage back towards MRP. A minimum wage set between W_m and the competitive wage flattens the marginal cost of labour over a range, so a monopsonist raises both wages and employment, the famous qualification to minimum-wage analysis supported by Card and Krueger's US fast-food study. Competition between employers does the same job where it exists, and regulators such as the Groceries Code Adjudicator police buyer conduct towards suppliers.

Application

The NHS is the classic public-sector case: it provides around 88% of UK healthcare and employs over two million people, including the great majority of nurses. In an answer, the roughly 40,000 nursing vacancies (2023) are your evidence that the administered wage sits below market clearing, and the 26% real-terms fall in junior doctors' pay since 2008, answered by the 2023 strikes, shows countervailing power being rebuilt. Walmart, the largest private employer in the United States with over 1.5 million US workers and 10,500 stores across 24 countries, illustrates both faces at once: rural wage-setting power over workers, and a 2021 study finding it pays suppliers less than other buyers. The teacher's fiscal twist earns evaluation marks: where Walmart wages fall short, food stamps and Medicaid fill the gap, so the state part-funds the low-wage model.

Amazon's 2014 stand-off with the publisher Hachette is the product-market case: delaying deliveries and steering customers to extract better supply terms. Use it alongside the platforms, where Uber and Deliveroo achieve monopsony-adjacent outcomes through algorithmic wage-setting without any single dominant employer, and the Seasonal Worker Visa, which ties farm workers to sponsor employers and so removes the between-farm mobility that once disciplined wages. Deploy each fact as evidence for a specific link in the chain: dominance establishes the power, vacancies or pay gaps show the wage below MRP, and worker or supplier responses show the cost.

Building the paragraph

A 25-mark monopsony answer usually pairs a labour-market chain with a supplier-market chain. Here is the second, built from the Amazon scaffold. Open with a topic sentence that carries the mechanism, the direction and the headline evidence:

Amazon's dominance as a buyer of books gives it the power to pay publishers below the competitive price, and the 2014 Hachette dispute shows it is willing to use that power; the long-run cost falls on readers.

1. Amazon is the dominant purchaser in the book market, so publishers face one buyer for a large share of their output; small publishers can depend on Amazon for 50 to 70% of revenue.
2. Facing the whole upward-sloping supply of titles, Amazon's marginal cost of purchasing lies above the supply curve, exactly as a labour monopsonist's MC of labour lies above S.
3. Diagram step: it buys where marginal cost of purchase equals its marginal value, a quantity below the competitive level, and pays a price read off the supply curve below P_c, with the supplier underpayment shaded.
4. Compressed margins force publishers to cut author advances and editorial investment, so the squeeze passes through to writers and to the quality of what gets commissioned.
5. Fewer and narrower titles reach readers: consumer choice and cultural diversity fall, and the price paid sits below the social value of books, a deadweight loss beyond the private one.
6. In the 2014 dispute Amazon delayed Hachette deliveries in launch windows and steered customers elsewhere, so publishers learn to self-censor risky acquisitions; the dynamic efficiency loss is the largest long-run cost.

Key terms

Term	Precise definition	Where it earns marks
Monopsony	A market with a single or dominant buyer of a good or of labour, able to set the price or wage it pays.	The AO1 opener of every monopsony paragraph; pair it with the wage-taker contrast.
Oligopsony	A market in which a few large buyers dominate purchasing, each holding some price-setting power.	Precision marks where the employer is dominant rather than sole (supermarkets, universities).
Marginal cost of labour	The addition to total labour cost from hiring one more worker, including the wage rise paid to all existing workers.	The step that justifies MC lying above S; examiners look for the "pay everyone more" logic.
Wage below MRP	The monopsony outcome in which the wage paid is less than the revenue the marginal worker generates, the gap kept as employer surplus.	Defines the exploitation claim precisely; anchors the shaded gap on the diagram.
Bilateral monopoly	A market in which a monopsonist employer faces a monopoly seller of labour, usually a union, so the wage is settled by bargaining.	The evaluation of union power: the outcome lies between Wm and MRP.