Monopsony
Based on Wikipedia: Monopsony
Imagine a small town with a single coal mine. Everyone who wants a job has exactly one option: work for the mining company. If you don't like the wages they're offering, tough luck. You can't negotiate, you can't threaten to leave for a competitor, and you can't hold out for better terms. The company knows this. They set wages as low as they can get away with, and workers accept because the alternative is no income at all.
This scenario has a name: monopsony.
You've probably heard of monopoly, where a single seller dominates a market and can charge whatever prices they want. Monopsony is its mirror image. Instead of one seller facing many buyers, it's one buyer facing many sellers. And while monopolies get all the attention in antitrust debates and board games, monopsonies quietly shape the modern economy in ways that affect millions of workers every day.
The Birth of a Strange Word
The term "monopsony" sounds like it belongs in a dusty economics textbook, and that's because it was coined in one. In 1933, the British economist Joan Robinson published "The Economics of Imperfect Competition," a landmark work that challenged the simplistic models of perfectly competitive markets that dominated economic thinking at the time.
Robinson needed a word for the phenomenon she was describing, and she turned to her colleague Bertrand Hallward, a classics scholar at Cambridge, for help. Hallward cobbled together two Greek words: "monos," meaning single, and "opsōneîn," meaning to purchase fish. The original Greek referred specifically to buying fish at market, which gives the word an oddly specific and somewhat comical etymology. Robinson's fish-buying monopolist became the foundation for understanding buyer-dominated markets.
But why "fish" specifically? In ancient Greek marketplaces, fish was a common commodity that buyers would negotiate for daily. The word evolved to mean purchasing provisions generally. So when you hear "monopsony," you can think of it as describing a single buyer who has cornered the market on fish. Or labor. Or anything else, really.
How Monopsony Actually Works
To understand monopsony, you need to understand a fundamental difference between how competitive markets work and how buyer-dominated markets work.
In a competitive labor market, if you're a worker unhappy with your wages, you have options. Multiple employers compete for your services. If Company A offers you thirty dollars an hour and Company B offers thirty-five, you go with Company B. This competition forces wages up toward what economists call the "market-clearing rate," the wage at which the supply of workers matches the demand for them.
In a monopsony, this mechanism breaks down. The single buyer doesn't have to compete with anyone. They can offer lower wages than they would in a competitive market, and workers have no choice but to accept. The company isn't paying workers based on what their labor is worth in an open market. They're paying based on how desperate workers are.
Here's where it gets interesting from an economic theory perspective. When a monopsonist wants to hire more workers, they face a peculiar problem. To attract additional employees, they typically have to raise wages. But they can't just raise wages for the new hires. They have to raise wages for everyone. This means the true cost of hiring one more worker isn't just that worker's wage. It's that worker's wage plus the wage increase for every existing employee.
Economists call this the "marginal cost of labor," and in a monopsony, it's always higher than the wage itself. This creates a perverse incentive: monopsonists hire fewer workers than they would in a competitive market, and they pay everyone less.
The Deadweight Loss Problem
There's a concept in economics called "deadweight loss." It sounds technical, but the idea is simple: it's value that gets destroyed when markets don't work properly.
Think of it this way. In a competitive market, everyone who wants to work at the market wage can find a job, and every employer who wants to hire at that wage can find workers. The system, for all its flaws, achieves a kind of efficiency. Supply meets demand.
In a monopsony, this doesn't happen. Some workers who would gladly work at the going wage can't find jobs because the monopsonist isn't hiring enough people. Some value that could be created, products that could be made, services that could be rendered, simply vanishes. It's not transferred to someone else. It's gone.
This is the yellow triangle that economists draw on their supply-and-demand diagrams. It represents genuine economic destruction, not redistribution.
But there's another effect too, represented by a gray rectangle in those same diagrams. This is money that gets transferred from workers to employers. Workers would have earned it in a competitive market, but under monopsony, the employer keeps it instead. Unlike deadweight loss, this money still exists. Someone has it. It just moved from one pocket to another.
This distinction matters enormously for policy. The gray rectangle problem could theoretically be fixed through taxation and redistribution. Tax the employers, give the money to workers, problem solved. But the yellow triangle, the deadweight loss, can't be fixed that way. The only solutions are either breaking up the monopsony or regulating wages directly.
The Minimum Wage Paradox
Here's something that surprises most people: in a monopsonistic labor market, minimum wage laws can actually increase employment.
This seems backwards. In a competitive market, minimum wages work exactly the way Econ 101 teaches. If you force employers to pay more than the market-clearing wage, they hire fewer workers. Supply exceeds demand, and unemployment rises. This is the standard textbook result that many economists cite when arguing against minimum wage increases.
But monopsony flips this logic on its head.
Remember how monopsonists hire fewer workers than the competitive equilibrium because hiring more workers means raising wages for everyone? A minimum wage short-circuits this calculation. If the law requires paying at least fifteen dollars an hour, the monopsonist can hire additional workers at fifteen dollars without having to raise existing workers' wages. The marginal cost of labor drops to equal the wage itself.
The result? The monopsonist finds it profitable to hire more workers than before. Employment goes up.
This isn't just theory. Economists have studied real-world minimum wage increases and found exactly this effect in certain labor markets. When David Card and Alan Krueger examined fast food employment in New Jersey after a minimum wage increase in the early 1990s, they found no employment decrease, and in some cases, employment actually rose. This was heresy at the time. It suggested that at least some labor markets operated under monopsonistic conditions.
The finding remains controversial. Not all labor markets are monopsonistic, and in competitive markets, minimum wages still reduce employment. The challenge for policymakers is figuring out which markets are which.
Where Monopsony Lurks Today
The classic mining town example feels anachronistic. Most people don't live in company towns anymore. But monopsony power shows up in subtler forms throughout the modern economy.
Consider school districts. Teachers in most areas can't easily move to competing districts. Geographic constraints, certification requirements that vary by state, family obligations, all of these limit mobility. A school district that's the only major employer of teachers in a region exercises significant monopsony power, even if it doesn't look like the coal company in a mining town.
Professional sports leagues provide another clear example. If you want to play baseball at the highest level in the United States, Major League Baseball is your only option. The league has structured itself to prevent competition for players, particularly before they reach free agency. Young players sign contracts with whichever team drafts them, at salaries determined by a pre-set structure, not by competitive bidding. This is textbook monopsony.
College athletics takes this even further. Until very recently, college athletes couldn't receive any compensation beyond their scholarships, despite generating billions in revenue for their institutions. The National Collegiate Athletic Association functioned as a cartel, with member schools agreeing not to compete for athletes on salary. This was pure monopsony power, and it only began to crack when courts ruled that prohibiting athletes from earning money from their name, image, and likeness violated antitrust law.
But perhaps the most consequential modern monopsonies operate in less obvious places. When a handful of grocery chains dominate food retail, they gain monopsony power over food suppliers. When a few tech giants control online advertising, they become monopsony buyers of digital ad inventory. When two or three large health systems serve a region, they exercise monopsony power over physicians and nurses.
The Gender Pay Gap Connection
Joan Robinson didn't develop monopsony theory just for intellectual exercise. Her original application, back in 1938, was to explain why women earned less than men for equivalent work.
Her reasoning was elegant. If women face greater constraints on their labor mobility than men, whether from family obligations, social expectations, or discrimination in hiring, then employers have more monopsony power over female workers. Women have fewer outside options, so employers can pay them less without losing them to competitors.
Modern research has confirmed this dynamic. Studies of grocery store chains have found that female employees have lower "wage elasticity" than men, meaning they're less likely to leave for better-paying jobs elsewhere. This gives employers more latitude to underpay them. Similar research on teachers has found that female teachers are paid less than male teachers in part because women face greater mobility constraints.
Interestingly, this suggests that equal pay legislation can function as a form of minimum wage law specifically for women. And if women face monopsonistic labor markets, such legislation might actually increase female employment rather than decrease it. When the United Kingdom implemented its Equal Pay Act, researchers found that it led to higher employment of women, exactly what monopsony theory would predict.
The Information Problem
There's a fascinating wrinkle in modern monopsony research. Traditional economic models assume workers know what they could earn elsewhere. They shop around, compare offers, and negotiate accordingly. Employers compete for their services by offering better wages.
But what if workers don't actually know their options?
A 2024 study of German workers found something remarkable: workers systematically underestimated what they could earn at other jobs. They thought their outside options were worse than they actually were. This informational disadvantage functioned like a kind of artificial monopsony. Even if other employers would pay more, workers didn't seek those opportunities because they didn't know they existed.
This finding has profound implications. It suggests that employer monopsony power can emerge not just from market structure, but from information asymmetries. Companies benefit when workers don't know their worth. This might explain why many employers discourage salary discussions among employees and why pay transparency laws face such fierce opposition.
It also suggests a relatively cheap intervention: simply providing workers with better information about market wages might reduce monopsony power without any regulatory heavy lifting.
Search Frictions and Modern Labor Markets
Recent economic research has pushed monopsony theory in unexpected directions. The old model assumed a single dominant buyer. But economists now recognize that monopsony-like conditions can exist even in markets with multiple employers.
The key concept is "search frictions." Finding a new job takes time and effort. You have to update your resume, search job listings, go to interviews, wait for offers, negotiate terms. All of this is costly, both in direct expenses and in time you could spend doing other things. And during the search process, you might not have income at all.
These frictions give every employer some degree of monopsony power. Even if other jobs exist, the cost of finding them means workers will tolerate wages somewhat below what they could theoretically earn elsewhere. Employers know this and set wages accordingly.
This model, called "search and matching," won its developers a Nobel Prize. It explains why labor markets don't clear instantly, why unemployment exists even in good times, and why wages can be "sticky" when economic conditions change. And at its heart is the recognition that some monopsony power exists in virtually every labor market, not just the obvious ones.
Monopsony in the Food Chain
The connection between monopsony and food prices might not be immediately obvious, but it's direct and consequential.
When grocery chains consolidate, they gain power over the farmers and food manufacturers who supply them. A farmer who grows lettuce has limited options for selling their crop. If three grocery chains control most retail food sales, those chains can dictate terms to lettuce farmers. Prices get pushed down. Farmers accept less because the alternative is not selling their crop at all.
This is monopsony in the supply chain. It doesn't just affect wages. It affects the prices paid for goods at every stage of production.
Recent research from the Atlanta Federal Reserve found a clear relationship between grocery store consolidation and food inflation. In areas where monopolies prevail, food inflation runs nearly half a percentage point higher than in more competitive markets. Over time, this compounds. The study showed that from 2006 to 2020, cumulative food price increases were significantly higher in concentrated markets.
But here's the twist: grocery chains often hold both monopoly and monopsony power simultaneously. They're monopolists (or near-monopolists) when selling to consumers, which lets them charge higher prices. And they're monopsonists when buying from suppliers, which lets them pay lower prices. They profit on both ends of the transaction.
This dual market power helps explain why grocery chains have posted record profits during recent inflationary periods. They squeeze suppliers while simultaneously raising consumer prices, capturing value from both directions.
What Can Be Done?
Monopsony presents a genuine market failure. Resources get misallocated. Employment falls below efficient levels. Workers get paid less than their contributions are worth. Value gets destroyed or transferred from workers to employers.
Policy options fall into a few categories.
First, antitrust enforcement. Breaking up monopsonies or preventing their formation restores competition. This is difficult in practice because buyer-side market power has historically received less attention than seller-side power. Regulators focus on preventing monopolies that harm consumers through high prices. They've paid less attention to monopsonies that harm workers or suppliers through low prices.
Second, minimum wage laws and other wage regulations. As discussed, these can actually increase employment in monopsonistic markets. The challenge is identifying which markets are monopsonistic and calibrating minimum wages appropriately.
Third, unionization. Collective bargaining creates "countervailing power" against employer monopsony. When workers negotiate as a group, they eliminate the individual-by-individual wage-setting that monopsonists exploit. This is why employer monopsony was a major justification for labor law reforms in the early twentieth century.
Fourth, information provision. If workers underestimate their outside options, simply providing better wage information might reduce monopsony power. Pay transparency laws, wage databases, and salary disclosure requirements all fall into this category.
Fifth, reducing job search frictions. Unemployment insurance, job placement services, and policies that support worker mobility all make it easier for workers to find alternatives to monopsonistic employers.
None of these are perfect solutions. Each has tradeoffs and implementation challenges. But recognizing that monopsony exists, that it's widespread, and that it causes real economic harm is the first step toward addressing it.
The Bigger Picture
For most of the twentieth century, economics taught that labor markets were basically competitive. Wages reflected the value workers contributed. If workers were paid less, it was because they were worth less. Market forces ensured efficient outcomes.
Monopsony theory challenges this comfortable assumption. It shows how structural power imbalances can depress wages and employment even when workers are highly productive. It explains persistent phenomena like the gender pay gap that competitive models struggle with. And it reveals how consolidation in any market can ripple through to affect workers and suppliers throughout the economy.
When you see a story about grocery chains colluding to raise prices, or tech companies agreeing not to poach each other's engineers, or hospital systems merging into regional giants, monopsony is the lens that helps you understand what's really happening. It's not just about consumer prices. It's about power, and who has it, and what they do with it.
Joan Robinson, coining her strange fish-purchasing word in 1933, probably didn't anticipate how relevant her theory would become. But in an era of increasing market concentration, gig economy employers, and debates about worker power, monopsony has never been more important to understand.