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In the late 1800s, a coal mining company might be the only employer for fifty miles in any direction. Workers had no practical ability to change employers without moving — and moving was expensive. The company set wages knowing workers had limited alternatives, paying far less than workers' productive value. That is monopsony in its clearest historical form. Today's equivalent: a hospital system that employs most nurses in a regional market, a major tech employer that is the only viable option for specialized AI researchers in a mid-size city, or a league of professional sports teams operating under antitrust exemptions.
The setup
Monopsony is a market structure in which there is a single buyer of a good or service — most analyzed in labor markets where an employer (or a small group of employers operating as a monopsonist) faces workers with limited outside options. The term comes from the Greek for "single buyer" and is the mirror image of monopoly (single seller).
A monopsonist does not face a horizontal labor supply curve (as competitive employers do) — it faces the full upward-sloping market labor supply curve. To hire additional workers, it must raise wages not just for the new hire but for all existing workers (assuming non-discriminating wage-setting). This creates a Marginal Factor Cost (MFC) of labor that exceeds the wage: to hire one more worker at a wage of $20 per hour, the firm might have to raise wages for 100 existing workers from $19 to $20 — costing far more than just the $20 for the new hire.
What happens — and why
The monopsonist maximizes profit by setting MFC = MRP (marginal factor cost equals marginal revenue product). Because MFC > wage, the profit-maximizing output is lower than the competitive level, and the wage paid is lower than the competitive wage — the monopsony exploits its buyer power to pay workers below their productive value.
The result:
- Lower wages than competitive equilibrium
- Lower employment than competitive equilibrium
- Deadweight loss from trades that would benefit both parties but don't occur
This analysis has a counterintuitive implication: in monopsonistic labor markets, a minimum wage can actually increase employment. By setting a wage floor above the monopsony wage, the minimum wage flattens the labor supply curve in the relevant range, eliminating the MFC > W distortion and moving the market toward competitive employment levels. This is the theoretical case for minimum wages beyond the standard competitive model. The Congressional Budget Office analysis of minimum wage effects acknowledges this monopsony channel as one reason minimum wage increases may have smaller negative employment effects than competitive models predict.
Where you see it in the wild
The Justice Department's challenge to non-compete agreements and the FTC's proposed ban on non-competes are directly motivated by monopsony analysis: non-competes limit worker mobility, reduce their outside options, and give employers wage-setting power — monopsony conditions without market concentration. The Princeton economists Alan Krueger and Orley Ashenfelter documented widespread use of franchise wage-fixing agreements by fast-food chains — explicit monopsony coordination that settled in FTC enforcement actions.
The fix (or why it's hard to fix)
Reducing monopsony power requires increasing worker outside options: better transportation, portable benefits, limits on non-competes, and antitrust enforcement against collusive hiring agreements. These improve labor market competition without the blunt instrument of wages floors, though minimum wages remain the most commonly used policy response.
