Monopsony

Monopsony

The mirror image of monopoly: a single buyer facing many sellers. Applied to labour, it is the employer who can pay less than the market rate without losing its employees.

In brief

Monopoly = a single seller. Monopsony = a single buyer. On the labour market, the employer is the buyer.
Definition by the US Treasury (2022): “the power of a firm to reduce the compensation it pays to its workers, by paying less than an equivalent job would pay in a perfectly competitive market”.
Effect: wages and employment below the competitive optimum.
Figure from the Treasury report: studies converge on wages being around 20% lower than in a fully competitive market.
Levers identified: concentration of employers, mobility frictions, non-compete clauses, no-poach agreements, and franchising — explicitly cited as a factor in the “fissuring” of work.

Monopsony is the economic concept that gives no-poach clauses their legal significance. Without it, a clause prohibiting one franchisee from hiring another franchisee's employee looks like a mere internal rule of good conduct. With it, the clause appears as an instrument for collectively fixing the price of labour: the employee who cannot go and negotiate with the competitor across the road no longer has any leverage.

The US Treasury report of March 2022 goes one step further: it names franchising among the mechanisms of “fissuring” of work that feed monopsony power. This is not a moral judgement: it is a description of the market.

Sources

Where this comes up in the case file

Other glossary entries — Economics