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 (ATR/AL). It is the product of the marginal product of labor (MPL) and the marginal revenue of output (MRQ). Thus, MRPL = ATR/AL = MPL X 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

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