Monopsony Research Articles

Estimating labor market monopsony power from a forward-looking perspective

This paper proposes a new approach to estimate the monopsony power of the labor market based on a forward-looking model of firm wage posting and worker job separation. In contrast to the literature, workers make job switching decisions based on firm-specific wage growth trajectories associated with different employers. The model is estimated using a matched employer employee panel data from Germany. The separation elasticity estimated from this model is greater than that from the conventional approach, suggesting that ignoring worker responses to heterogeneous wage growth rates lead to a potential overestimation of the actual monopsony power.

Monopsony Power in the Labor Market: From Theory to Policy

Labor markets are not perfectly competitive: Monopsony power enables employers to pay workers less than the marginal revenue product of labor. We review three theoretical frameworks explaining monopsony power. Oligopsony models attribute it to strategic interactions among a limited number of firms. Job differentiation models cite imperfect job substitution and heterogeneous worker preferences. Search-and-matching models point to search frictions hindering instantaneous access to all available jobs. We then develop a theory-informed discussion of the empirical evidence on antitrust policies, policies that reduce barriers to job switching, and policies countering monopsony's effects on workers. Preventing mergers and regulating noncompetition agreements can increase wages by preserving competition among employers. Minimum wages can mitigate the effect of monopsony power by increasing wages without reducing employment. The insights garnered from both theoretical models and empirical evidence offer a road map for crafting policies that can enhance competition in the labor market.

Considerations of monopsony in merger analysis: The Penguin Random House case

Abstract In 2020, Bertelsmann SE & Co., the owner of Penguin Random House (PRH), offered to acquire Simon & Schuster for $2.175 billion. If the merger had been consummated, the newly merged firm would have had a 49 per cent share of the market for publishing rights to anticipated top-selling books. Concerned by the proposed merger, the Department of Justice alleged that a more concentrated sector for publishing would result in lower advances to authors of highly anticipated books. The antitrust concern, therefore, centred on the exercise of monopsony power rather than monopoly power. The District Court was persuaded by the evidence presented at trial and blocked the merger on that ground. Having lost at trial, PRH decided to forgo an appeal. This article provides a brief analysis and critique of the District Court’s ruling.

Acquihiring for Monopsony Power

It is often argued that startups are acquired for the sole purpose of hiring specialized talent. We show that the goal of such acquihires might be to shut down the most relevant labor market competitor. This grants the acquirer monopsony power over specialized talent. As a consequence, acquihiring may harm employees and be socially inefficient. We explore the robustness of these effects, allowing for private benefits associated with working at a startup, varying bargaining protocols, multiple employees with and without complementarities, and private information. This paper was accepted by Maria Guadalupe, strategy. Funding: H. Bar-Isaac thanks the Social Sciences and Humanities Research Council of Canada for financial support. V. Nocke gratefully acknowledges support from the German Research Foundation (DFG) through CRC TR 224 [Project B03].

When Monopsony Power Wanes

Abstract In this Part 2, Subjective Agency, I delve into the evolving power and agency of workers as structural conditions undergo transformation. Part 1 described how the law of competition propels firms towards centralisation, gradually diminishing the monopsony power wielded by global buyers in labour-intensive sectors. While manufacturers gain more power and significance, capable of undermining workers’ power, they also become susceptible to disruption. This section introduces the concept of Degree of Spatial Inflexibility (dsi). It posits that as a manufacturer’s monopoly power increases, the monopsony power in the supply chain decreases. However, this elevated monopoly power simultaneously establishes a higher dsi, amplifying the potential for worker disruption. It is essential to recognise that structural power shifts do not guarantee automatic benefits for workers; instead, they necessitate workers to capitalise on these vulnerabilities. This establishes a dialectical relationship between the evolving conditions of capital outlined in Part 1 and the subjective agency of workers, as detailed in Part 2 below.

Monopsony in local labour markets

Abstract We investigate employer monopsony power in local labour markets in the UK. We propose a model in which market power stems from idiosyncratic worker preferences over non-wage attributes of jobs, including the commuting distance. This set-up delivers point-specific, overlapping local labour markets. The resulting concentration index reflects the intensity of commuting flows between local areas, and is lower than the conventional index based on self-contained, non-overlapping areas because commuting across local areas expand workers’ outside options. We estimate that employment concentration in local labour markets was slightly falling over the past 2 decades. The model-based concentration index is negatively correlated to local wages and performs better than other purely local concentration measures. However, in quantitative terms, the observed fall in concentration can predict only a negligible increase in wages.

Labour market inequality: a comparative political economy perspective

Abstract Large and rising earnings and employment inequalities in countries such as the USA and the UK pose fundamental questions for social scientists and challenges for policymakers. Mainstream economists have explained these outcomes mainly in terms of competitive market forces, particularly the mismatch between technology-driven demands for skills and those supplied by workers. In contrast, political economy perspectives focus on employer–employee bargaining power, driven by the monopsony power of firms and declining institutional and policy protections for workers. We critically assess the evidence on the education wage premium and employment polarization used to support the competitive market explanation for US wage inequality. We then show that the incidence of decent pay for young less-educated workers varies sharply across similarly rich countries and that new indices of institutional bargaining power closely correspond to differences in pay distributions but are uncorrelated with conventional measures of employment performance. We conclude that well-designed institutional and policy changes can substantially promote shared growth and the well-being of working families.

Monopsony Power and Cost Structure: Evidence from the U.S. Hospital Industry

ABSTRACT We examine the association between monopsony power and hospital cost structure using data from more than 2,000 U.S. hospitals. Monopsony characterizes a market with a single buyer and many suppliers. Accordingly, monopsony power is a potentially critical determinant of cost structure because it affects managers’ resource procurement decisions. Results indicate that hospitals with monopsony power adopt more elastic cost structures, and monopsony power magnifies the positive relationship between demand uncertainty and cost elasticity identified in prior research. These findings suggest monopsony power lowers the costs of procuring resources on flexible, short-term, and variable bases as opposed to making long-term commitments. Therefore, due to the high fixed-cost nature of the industry, hospitals with monopsony power choose more variable cost structures and make larger cost structure adjustments in response to demand uncertainty. Although we conduct this research using hospitals, our theory and results have implications for other industries. Data Availability: Data are publicly available from the sources cited in this study. JEL Classifications: D22; D23; I11; M20; M40.

Power in mixed martial arts (MMA): a case study of the ultimate fighting championship (UFC)

ABSTRACT This study analyses and explains how the Ultimate Fighting Championship (UFC) acquired and retains monopoly and monopsony power over Mixed Martial Arts (MMA) in a complex political, legal, regulatory, and financial context. A qualitative and interpretive approach to research underpins a thematic analysis of social media and journalistic content alongside a review of a limited academic literature. It is found that the UFC has acquired and retained monopoly and monopsony power in a context of weak regulation, limited competition, ineffective legal and political intervention, and an absence of unionisation. The three key strategies employed by the UFC to sustain power over MMA were found to be 1. control of athlete labour via restrictive contracts; 2. acquisition of competitor promotions, expertise, and commercial contracts; and 3. building reputation and legitimacy via public relations and lobbying activities. The UFC has employed a combination of legitimate, referent, reward, expert, informational, and coercive power to become the dominant organisation in MMA.

Nominal wage patterns, monopsony, and labour market power in early modern England

AbstractRecords of long‐eighteenth‐century English wage rates exhibit almost absolute nominal rigidity over many decades, alongside significant dispersion between the wages paid by different organizations for the same type of work in the same location. These features of preindustrial wages have been obscured by data aggregation and the construction of real wage series, which introduce variation. In this paper, we argue that the standard explanations for wage rigidity in economic history are insufficient. We show econometric evidence for monopsony power in one major organization and argue that the main historical wage series are also affected by employer power. Eighteenth‐century England had an imperfectly competitive labour market with large frictions. This gave large organizations the power to set wage policies. We discuss the implications for the eighteenth‐century British economy and research into long‐run wages more generally.

Labor market monopsony power in the manufacturing sector of four Sub‐Saharan African countries

AbstractWe estimate labor market monopsony power among manufacturing firms in four Sub‐Saharan African countries using a parametric production function approach on panel dataset. Pooled estimate suggests that wages are approximately 38 percent of the marginal revenue product of labor, implying a labor supply elasticity of 0.62. Nonparametric robustness checks indicate these results are robust to concerns over parametric model misspecification. Departure from competitive labor market leads to approximately 50.80 percent higher employer rent, 75.61 percent lower employee rent, and 15.95 percent deadweight loss. Overall, our results are suggestive of monopsonistic labor markets.

Paying Living Wages in Supply Chains: The Effects of Uncertainties, Coordination, and Competition

The living wage (LW) movement is part of the fight against forced labor: It aims to ensure that workers receive an income that can cover their daily subsistence needs. Our study expands the current understanding of LW pay by shifting from the traditional labor-capital view to an operations and supply chain management perspective. We use a game theoretical approach to explore the different responses of two competing supply chains to LW accreditation. We find that a moderate LW standard allows for Pareto optimality where key stakeholders (i.e., manufacturers, retailers, consumers, and workers) have a collective interest in promoting the LW movement. From a multistakeholder lens, the LW movement is only sustainable if the LW standard is neither too aggressive nor too conservative. We further demonstrate the following points. (1) Not all types of uncertainties are harmful to supply chains with LW pay. Yield uncertainty slows down the progress of the LW movement, whereas demand uncertainty encourages the voluntary adoption of LW pay among all stakeholders. (2) Supply chain coordination may slow the adoption of voluntary LW pay, which implies that the classic coordination paradigm is not a panacea in alleviating the plight of underpaid workers. (3) From the perspective of competition intensity, greater monopsony power hinders the progress of the LW movement, and we provide evidence for the positive effects of a competitive environment on incentivizing voluntary LW pay.

Monopsony power, offshoring, and a European minimum wage

AbstractThis paper sets up a two‐country model of offshoring with monopolistically competitive product and monopsonistically competitive labor markets. In our model, an incentive for offshoring exists even between symmetric countries, because shifting part of the production abroad reduces local labor demand and allows firms to more strongly execute their monopsonistic labor market power. However, offshoring between symmetric countries has negative welfare effects and therefore calls for policy intervention. In this context, we put forward the role of a common minimum wage and show that the introduction of a moderate minimum wage increases offshoring and reduces welfare. In contrast, a sizable minimum wage reduces offshoring and increases welfare. Beyond that, we also show that a sufficiently high common minimum wage cannot only eliminate offshoring but also inefficiencies in the resource allocation due to monopsonistic labor market distortions in closed economies.

The Nature of Labor’s Vulnerability to Exploitation

I identify a hitherto unrecognized contribution of labor to production stemming from an innate sense of psychological ownership of the fruits of one’s labor. This is rooted in the consciousness accompanying all human activities and is distinct from legal ownership. Consciousness is inalienable; it cannot be contracted on. Labor’s psychological ownership generates quasi-rents, which can be appropriated by capitalist firms with market power. Monopsony power, now empirically seen to be ubiquitous in labor markets, has more serious efficiency and equity consequences than recognized. In a neoclassical framework, I also show why labor is uniquely vulnerable to exploitation—reconciling it with Marxian views. If capitalist owners are taken to be unaware of their workers’ psychological ownership, this exploitation occurs even in competitive labor markets. JEL Classification: P12, J22, J3, J42, D41

Worker Beliefs About Outside Options

Abstract Standard labor market models assume that workers hold accurate beliefs about the external wage distribution, and hence their outside options with other employers. We test this assumption by comparing German workers’ beliefs about outside options with objective benchmarks. First, we find that workers wrongly anchor their beliefs about outside options on their current wage: workers that would experience a 10% wage change if switching to their outside option only expect a 1% change. Second, workers in low-paying firms underestimate wages elsewhere. Third, in response to information about the wages of similar workers, respondents correct their beliefs about their outside options and change their job search and wage negotiation intentions. Finally, we analyze the consequences of anchoring in a simple equilibrium model. In the model, anchored beliefs keep overly pessimistic workers stuck in low-wage jobs, which gives rise to monopsony power and labor market segmentation.

When Monopsony Power Wanes

Abstract In this Part 1, Material Conditions, I look at the changing material conditions of capital in the most labour-intensive manufacturing sectors in world production. I argue that these changes are leading to a waning in monopsony power. The paper introduces a universal logic that governs competition and reshapes the chain around the question of monopsony in the global supply chain. Put simply, deregulation produces high degrees of monopsony power, increasing the value share for the lead firm. This intensifies competition, exerts downward pressure, and winnows the number of suppliers able to compete. The result is a supplier consolidation. Consolidation increases the surviving suppliers’ share of value, which expands access to finance, facilitates self-investment, and raises entry barriers. In Part 2, Subjective Agency, I look at how this leads to the emergence of market spatial inflexibility, which has given labour new openings by increasingly their disruptive power.

Monopsony Power and Poverty: The Consequences of Walmart Supercenter Openings

Monopsony Power and Poverty: The Consequences of Walmart Supercenter Openings

A Comment on: “Walras–Bowley Lecture: Market Power and Wage Inequality” by Shubhdeep Deb, Jan Eeckhout, Aseem Patel, and Lawrence Warren

A burgeoning literature in labor economics is focused on modeling employer labor market power, generally finding nontrivial estimates of monopsony power. A smaller literature also simultaneously incorporates product market power. Deb, Eeckhout, Patel, and Warren (2024) is an example of applying an oligopoly‐oligopsony model to the U.S. labor market, arguing for important effects on wage levels and inequality from rising market power. I support combining IO and labor as a fruitful way of studying wages and business dynamism, but argue for looking more broadly at (i) differential degrees of employer power in labor and product markets; (ii) investigating the dynamic sources of markups (e.g., through innovation), and (iii) considering wage bargaining models, not just wage posting models, which have some starkly different implications for wage setting.

Monopsony power in the United States: Evidence from the great depression

This paper presents evidence that firms had labor market power during the early 1930s. Using plant-level data from the Census of Manufactures between 1929 and 1935, I construct a Herfindahl-Hirschman Index of local labor market concentration at the State-Economic-Area-by-industry-by-occupation level. I find that local labor market concentration has a negative relationship with wages which is consistent with labor market monopsony power. The results are robust to excluding local labor markets with one firm, excluding industries with local product markets, as well as the inclusion of industry characteristic, SEA, and occupational time trends. I find evidence that New Deal minimum wage policies weakened monopsony power. I also find suggestive evidence that high unemployment rates during 1930 reduced workers’ bargaining power.

Monopsony in spatial equilibrium

An emerging labor economics literature examines the consequences of firms exercising market power in local labor markets. The extent of this market power is likely to vary across local labor markets. In choosing what local labor market to live and work in, workers tradeoff wages, house prices and local amenities. Building on the Rosen/Roback spatial equilibrium model, we investigate how the existence of local monopsony power affects the cross-sectional spatial distribution of house prices across cities. We find that house prices decline with increases in the employment concentration in the local market. For renters, this offsets roughly 70 percent of the estimated monopsony wage effect and shifts part of the costs of monopsony to homeowners. We find evidence that collective bargaining and minimum wages limit the extent of capitalization of monopsony power into house prices.