Unregulated monopoly sellers typically limit production and offer their products at high prices. The private and social costs of this behavior are often measured by above-normal profits, inefficient production methods, and lagging rates of innovation. How is this inefficiency reduced, if not eliminated, in unregulated markets? Sometimes the answer lies in the development of countervailing forces within markets.

Seller Versus Buyer Power

Countervailing power is an economic influence that creates a closer balance between previously unequal sellers and buyers. The classic example is a single employer in a small town that might take advantage of the local labor force by offering less-than-competitive wages. As the single employer, the company has a monopsony in the local labor market. Workers might decide to band together and form a union, a monopoly seller in the local labor market, to offset the monopsony power of the employer.

To illustrate this classic confrontation, consider Figure 10.9, which shows demand and supply relations in a local labor market. The downward-sloping demand for labor is simply the marginal revenue product of labor (MRPL) curve and shows the amount of net revenue generated through employment of an additional unit of labor (ΔTRL). It is the product of the marginal product of labor (MPL) and the marginal revenue of output (MRQ). Thus, MRPL = ΔTRL = MPL _ MRQ. MRPL falls as employment expands because of the labor factor’s diminishing returns. An upward-sloping supply curve reflects that higher wages are typically necessary to expand the amount of labor offered. Perfectly competitive demand and supply conditions create an exact balance between demand and supply, and the competitive equilibrium wage, WC, and employment level, EC, are observed.

A monopsony employer facing a perfectly competitive supply of labor sets its marginal cost of labor, MCL, equal to the marginal benefit derived from employment. Because the employer’s marginal benefit is measured in terms of the marginal revenue product of labor, an unchecked monopsonist sets MCL = MRPL. Notice that the MCL curve exceeds the labor supply curve at each point, based on the assumption that wages must be increased for all workers in order to hire additional employees. This is analogous to cutting prices for all customers in order to expand sales, causing the MR curve to lie below the demand curve. Because workers need to be paid only the wage rate indicated along the labor supply curve for a given level of employment, the monopsonist employer offers employees a wage of WM and a less than competitive level of employment opportunities, EM.

An unchecked union, or monopoly seller of labor, could command a wage of WU if demand for labor were competitive. This solution is found by setting the marginal revenue of labor (MRL) equal to the labor supply curve, which represents the marginal cost of labor to the union. Like any monopoly seller, the union can obtain higher wages (prices) only by restricting employment opportunities (output) for union members. Aunion is able to offer its members only the less than competitive employment opportunities, EU, if it attempts to maximize labor income.

Compromise Solution

What is likely to occur in the case of the monopoly union/monopsony employer confrontation? Typically, wage/employment bargaining produces a compromise wage/employment outcome. Compromise achieved through countervailing power has the beneficial effect of moving the labor market away from the inefficient unchecked monopoly or monopsony solutions toward a more efficient labor market equilibrium. However, only in the unlikely event of perfectly matched monopoly/monopsony protagonists will the perfectly competitive outcome occur. Depending on the relative power of the union and the employer, either an above-market or a below-market wage outcome typically results, and employment opportunities are often below competitive employment levels. Nevertheless, monopoly/monopsony confrontations can have the beneficial effect of improving economic efficiency from that experienced under either unchecked monopoly or monopsony.

Monopoly Union and Monopsony Employer Confrontation in the Labor Market

Monopoly Union and Monopsony Employer Confrontation in the Labor Market

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Managerial Economics Topics