What Is a Monopsony? Definition and Examples

Search Fintrev

Search our guides, reviews and glossary.

A monopsony is a market with a single buyer facing many sellers. Because the buyer accounts for all, or nearly all, of the demand, it can push the price it pays below the level a competitive market would set, usually by buying less. The seller in question can be a supplier of goods, such as a farmer selling crops, or a worker selling labor to an employer. The firm holding that power is called the monopsonist, and a market where buyers have some of this power without being the only buyer is called monopsonistic.

What Is a Monopsony?

The word comes from the Greek monos (single) and opsonia (purchase). The British economist Joan Robinson introduced it in The Economics of Imperfect Competition (1933), crediting a colleague with coining the term, to describe the buyer-side mirror of monopoly.

In a perfectly competitive market, each buyer takes the market price as given and cannot affect it. A monopsonist is the market’s demand. To buy more, it has to offer a higher price to draw in more sellers, and in most cases that higher price applies to every unit it buys, not only the extra ones. Faced with that cost, the monopsonist prefers to buy a smaller quantity at a lower price.

Pure monopsony, with literally one buyer, is rare. The more common situation is monopsony power: a buyer large enough, or sellers with few enough alternatives, that the buyer can set terms rather than accept them. Economists use the same tools to analyze both.

Main features

• Limited alternatives for sellers. If sellers can easily switch to other buyers, the market is not a monopsony.
• Weak bargaining power for sellers. There may be thousands of sellers, but each depends on the same buyer, so none can hold out for a better price.
• Weaker incentives for sellers to invest. When the single buyer sets the price, a supplier cannot capture the gains from better quality or efficiency, so the reward for innovation shrinks. This is a tendency, not a certainty; it depends on whether the buyer chooses to pay for quality.

How a Monopsony Works

The key concept is marginal factor cost (MFC), sometimes called marginal cost of labor or marginal expenditure. It is the extra cost of buying one more unit, including the effect on all the units already bought.

For a monopsony employer that must pay the same wage to everyone:

• Total labor cost = wage × number of workers = w(L) × L
• Marginal factor cost = w + L × (change in wage per extra worker)

Because the wage rises as the firm hires more people, MFC is always above the wage. The firm hires until the MFC of the last worker equals that worker’s marginal revenue product (MRP), the extra revenue the worker generates. It then pays the lowest wage at which that number of people will work, which it reads off the labor supply curve.

Worked example (hypothetical)

Assume a single employer in an isolated town faces these conditions, with wages in dollars per hour and L in workers:

• Labor supply: w = 10 + L (to attract each additional worker, the wage for everyone rises by $1)
• Marginal revenue product: MRP = 40 − L (each additional worker adds a little less revenue)

Step 1: Find marginal factor cost. Total cost is (10 + L) × L = 10L + L². The cost of one more worker is MFC = 10 + 2L.

Step 2: Set MFC equal to MRP. 10 + 2L = 40 − L, so 3L = 30 and L = 10 workers.

Step 3: Find the wage from the supply curve. w = 10 + 10 = $20 per hour.

Step 4: Compare with a competitive market. If many employers competed for these workers, the wage would settle where supply meets MRP: 10 + L = 40 − L, so L = 15 and w = $25.

The monopsonist hires 5 fewer workers and pays $5 less per hour. At its chosen employment level, the last worker generates $30 of revenue (40 − 10) but earns $20. That $10 gap is what Robinson’s contemporary Arthur Pigou called monopsonistic exploitation.

Step 5: Measure the deadweight loss. The five workers who would have been hired in a competitive market each produce more than the wage they would have accepted. The lost value is the triangle between the MRP and supply curves from L = 10 to L = 15: ½ × 5 × (30 − 20) = $25 per hour, value that is not transferred to anyone but simply goes unproduced. Removing it requires bringing employment back to the competitive level, through more competition among employers, stronger bargaining by workers, or a wage floor at the competitive wage.

Interpreting a monopsony

The same logic produces a compact formula. If ε is the elasticity of labor supply to the firm (the percentage change in workers willing to work there for a 1% change in its wage), the profit-maximizing wage is:

w = MRP × ε / (1 + ε)

This wage markdown shows that monopsony power depends on how responsive workers are, not on how many employers exist. With ε = 4 (hypothetical), the wage is 80% of MRP. With ε = 9, it is 90%. As ε grows very large, workers would leave for even a tiny pay cut, and the wage approaches the full MRP, which is the competitive outcome.

This is why economists distinguish a classic single-employer monopsony from dynamic or “new” monopsony, a framework associated with Alan Manning’s Monopsony in Motion (2003). Even with many employers, job search takes time, workers have preferences about commute and schedule, and switching jobs is costly, so each employer faces an upward-sloping labor supply curve and gains some wage-setting power. Research on online task platforms, where thousands of requesters post work, has found that small pay differences shift labor supply only modestly, consistent with monopsony power in a market that looks crowded.

How Monopsonies Arise

Monopsony power needs something that limits the sellers’ alternatives. Common sources include:

• Physical isolation. In remote areas or where transport is expensive, there may be one realistic buyer within reach, such as a rural hospital employing nurses or a single processing plant buying from local farmers.
• Narrow or specialized demand. Highly specialized equipment, agricultural products that cannot be shipped far, and skills tied to one industry leave sellers dependent on a small set of buyers.
• Barriers to entry for buyers. Permits, credentials, regulation or large capital requirements can stop new buyers from entering and bidding prices up.
• Consolidation. When buyers merge, the combined firm replaces two sources of demand with one. The 2020 merger of T-Mobile and Sprint, for example, reduced the number of large national carriers buying network equipment and services, and hiring in the same occupations.
• Government as the buyer. When the state is the only purchaser, as with military weapons systems or many medical services and drugs in single-payer health systems, it holds monopsony power by design. Governments can also create it through contracts that limit whom sellers may supply.
• Restrictions on switching. Non-compete agreements, no-poach clauses and similar contract terms reduce workers’ outside options, which lowers the elasticity of supply in the wage markdown formula above.

Why Is a Monopsony Important?

Monopsony changes how economists predict the effects of several policies.

Minimum wages. In a competitive labor market, a minimum wage above the market wage reduces employment. Under monopsony, a wage floor can raise both pay and hiring. In the worked example, a $24 minimum wage makes the firm’s marginal cost a flat $24 until the supply curve reaches that level at 14 workers. Since the 14th worker still generates $26, the firm hires 14 people at $24, compared with 10 at $20 without the floor. A floor of $25 restores the competitive outcome. Above $25, the floor starts cutting employment again: at $28, the firm hires only 12. The policy question is where actual minimum wages sit relative to this range, which empirical studies estimate rather than assume. The 1994 study by David Card and Alan Krueger, which found no employment drop in New Jersey fast-food restaurants after a minimum wage increase, is often discussed in this context.

Antitrust and mergers. Merger review has traditionally focused on whether consumers will pay higher prices. Monopsony shifts attention to whether merged firms will pay suppliers or workers less. In 2018, Alan Krueger and Eric Posner proposed, through The Hamilton Project, closer scrutiny of mergers for labor market effects, a ban on non-compete clauses for low-wage workers and a prohibition on no-poaching agreements among franchises of the same company. They argued that monopsony and employer collusion may contribute to wage stagnation and rising inequality.

Collusion among employers. When several large buyers coordinate, they can act like one monopsonist, a structure called an oligopsony. Meatpacking, where a small number of processors buy most of the cattle, and markets for specialized engineers with a handful of large employers are commonly discussed examples. In 2010 the U.S. Department of Justice reached a settlement with several large technology companies, including Apple, Google, Intel and Adobe, over agreements not to recruit each other’s employees; a related private class action followed.

Non-competes. In April 2024 the Federal Trade Commission voted to ban most non-compete agreements in employment contracts. In August 2024 a federal judge in Texas set the rule aside, holding that the FTC had exceeded its authority.

Supplier markets. Outside labor, monopsony affects farmers, manufacturers and content creators who sell to dominant buyers. The wine producer E. & J. Gallo, for instance, has been described as holding monopsony-like power over grape growers because of the volume it buys.

Monopsony power is also one of several explanations economists debate for the widening gap since the 1970s between productivity growth and typical worker pay, documented by the Economic Policy Institute, alongside technology, trade and declining union membership.

Example of a Monopsony

The textbook case is the company town. Picture a mining company that opens a mine in an area with no existing population. Workers move in, a town grows around the mine, and the company becomes the only significant employer. It decides how many people to hire and at what wage, and workers who would need to relocate to find other jobs accept lower pay and worse conditions than they would elsewhere.

This was not only a hypothetical. In U.S. coal regions in the late 19th and early 20th centuries, many workers lived in company-owned housing and were sometimes paid in scrip redeemable only at the company store. That gave the employer power both as the buyer of labor and as the seller of goods to the same workers.

A modern, less extreme version is a regional hospital system that employs most of the nurses in a metropolitan area. Nurses can still change employers in principle, but if the alternatives involve a long commute or a move, the hospital faces a labor supply curve steep enough to hold wages below what competing employers would offer.

Monopsony vs. Monopoly and Related Structures

The two terms are mirror images. A monopoly controls supply; a monopsony controls demand.

Both monopoly and monopsony reduce the quantity traded below the competitive level, so both create deadweight losses. The difference is who bears the cost. Under monopoly, buyers pay more. Under monopsony, sellers receive less.

When a monopoly seller meets a monopsony buyer, the result is a bilateral monopoly. A union bargaining with the only large employer in an industry is the standard example. The outcome is not pinned down by supply and demand; it falls within a range determined by each side’s bargaining strength. This is one reason some economists argue that collective bargaining can offset employer monopsony power.

A single firm can also be both: dominant as a seller in its product market and dominant as a buyer in its input or labor market.

Limitations of a Monopsony

• Pure monopsony is uncommon. The practical question is how much power a buyer has, which depends on sellers’ alternatives, not on a simple count of buyers.
• Power is hard to measure. Concentration ratios count employers or buyers in an area, but the wage markdown depends on supply elasticity, which must be estimated and varies with how the labor market is defined (by occupation, commuting zone or skill).
• The basic model assumes one wage for everyone. A buyer that can pay each seller a different price, a form of perfect price discrimination, does not need to cut quantity to cut costs, and the deadweight loss can disappear even as the buyer captures most of the surplus.
• Buyer power is not always harmful. A large buyer can offset a powerful seller. Government health systems use purchasing power to negotiate drug prices, and large retailers can pass lower costs on to consumers. Whether society gains depends on whether the buyer reduces quantity or only redistributes surplus away from a seller that was itself charging above-competitive prices.
• Markets change. Remote work, better transport and new entrants can raise supply elasticity and erode monopsony power that once looked durable.

FAQs

The Bottom Line

Monopsony matters to workers, farmers and suppliers who depend on a few dominant buyers, and to policymakers judging minimum wages, mergers and non-compete rules. The real question is how much wage-setting power a buyer holds, which turns on sellers' alternatives rather than a simple count of buyers. More competition among buyers, stronger seller bargaining or a well-placed wage floor can move outcomes back toward competitive levels.