The term 'monopsony' was introduced by Cambridge economist Joan Robinson in her 1932 book, *The Economics of Imperfect Competition*. At her request, a classics scholar colleague suggested 'monopsony' over the more direct Greek analogy 'mono-ony,' as it was deemed to sound better. The term's literal translation from Greek is 'a market with a single buyer of fish'.

Origin of the Term 'Monopsony'

In a scenario like the Browneville model, where a single firm is both the sole employer (a monopsonist) and a significant polluter, two distinct types of conflict emerge simultaneously. The first is an environmental conflict between the firm and the citizens over the level of toxic emissions. The second is a traditional labor conflict between the employer and its employees (who are also the citizens) over the level of wages.

Compounded Conflicts in the Polluting Monopsonist Model

Labour market power, also referred to as monopsony power, is a firm's ability to lower the wage it needs to pay by reducing the number of workers it hires. This power is not limited to a strict monopsony (a single employer); it can exist more generally, even when workers have alternative employment options.

Labour Market Power (Monopsony Power)

A monopsony is a market structure with only one buyer for a good, service, or factor of production like labor. This single buyer, known as a monopsonist, holds significant market power. The term originally referred specifically to a single buyer of labor, such as the only major employer in a town, which would have the power to control local wages by managing employment levels. The concept is the buyer-side equivalent of a monopoly and is foundational to understanding the more general concept of monopsony power.

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Market power is a form of economic power where an actor can profit by setting the terms of an exchange, such as influencing the price of goods or services. This power can be derived from sources like cost advantages or significant product differentiation from competitors. It can be exercised in various markets, including those for selling goods and hiring labor. For instance, a single major employer in a town holds significant market power, as they can dictate wages due to the lack of alternative employment for workers.

Market Power

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Monopsony

According to research by economist Jan Eeckhout and his collaborators, there has been a continuous increase in market power held by firms since the 1980s.

Research on the Rise of Market Power

Large firms can often achieve economies of scale by using their significant purchasing volume to negotiate more favorable terms and lower prices for inputs from their suppliers. This increased bargaining power compared to smaller firms constitutes a significant cost advantage.

Bargaining Power in Input Purchasing as a Source of Economies of Scale

Measuring market power in two-sided markets, such as digital platforms, is particularly complex. A platform's degree of market power can vary substantially between the two groups it serves, making a single measure insufficient. This challenge is evident when a platform offers its services for free to one group of users, like Facebook does for its general users, seemingly earning no profit margin from them. Meanwhile, it can exercise considerable market power and generate significant profits on the other side of the market, for instance, by selling advertising space.

Difficulty in Measuring Market Power in Two-Sided Markets

Product differentiation gives firms a significant competitive advantage and market power. This advantage manifests as the ability to have greater control over pricing and to generate economic rents. By creating products with unique features, firms make consumer demand less sensitive to price changes. This allows them to set higher prices and earn greater profits without losing their customer base.

Product Differentiation as a Source of Competitive Advantage and Market Power

A dominant firm is a company that holds a significant share of a market but is not a pure monopoly, as it still faces some competition. Unlike a monopolist, which is the sole seller, a dominant firm can control a large portion of the market, like De Beers' historical control of the diamond market, while other smaller firms also operate.

Dominant Firm

A firm's power to set a price above its marginal cost is determined by the elasticity of its demand curve. The elasticity serves as a comprehensive measure of the competition the firm faces from all other products, as it reflects how sensitive consumers are to price changes.

Demand Elasticity Determines Price-Setting Power

Joan Robinson (1903–1983) was a prominent British economist who gained significant recognition in 1933 for her first major work, *The Economics of Imperfect Competition*. In this book, she challenged conventional economic thought by developing the analysis of monopolistic competition and is also credited with coining the term 'monopsony'. She was a member of an influential circle of economists at the University of Cambridge who provided feedback to John Maynard Keynes to help refine his seminal 1936 work, *The General Theory*. Subsequently, in 1937, she authored *Introduction to the Theory of Employment*, a book designed to make Keynes's theories more understandable for students. Her eminence in the field was acknowledged by Paul Samuelson, a leading 20th-century economist, who in a 1970 letter suggested that Robinson might be the best economist in the world. Despite her acclaimed intellectual contributions, Robinson was never awarded a Nobel Prize, leading to considerable speculation. One suggested reason for this omission is her persistent critique of mainstream economic theories, including pointedly the ideas of Paul Samuelson.

Joan Robinson (1903–1983)

A central question in the study of firms and markets is identifying the factors that enable a firm to increase its market power. This involves understanding the conditions and strategies that allow a company to gain greater control over the price of its goods or services.

Factors that Increase a Firm's Market Power

A firm's market power can originate from its cost structure, particularly when it experiences decreasing average costs. This scenario can be caused by factors such as economies of scale, high fixed costs spread over more units, or obtaining lower prices for inputs when buying in larger volumes. In such a cost structure, the marginal cost of producing an additional unit is lower than the average cost of all units produced. For the firm to be financially viable and avoid losses, its price must at least cover the average cost. Consequently, the price must be set at a level higher than the marginal cost.

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