Volume 10, No. 2 (Summer 2007)
The standard theory of monopsony originated with Joan Robinson in her The Economics of Imperfect Competition (1933). This standard theory describes employers as facing upward-sloping supply curves of labor, in contrast to the model of perfect competition wherein individual employers face perfectly elastic supply curves. In perfect competition, the labor market as a whole is characterized by an upward-sloping supply curve, but in monopsony the individual employer is the entire market. Hence the employer’s marginal cost of labor is greater than the supply price. The employer hires labor up to the quantity for which the marginal cost of labor equals the marginal revenue product of labor. Consequently, both the wage and employment levels are less than they would be under the model of perfect competition. The wage rate is less than the marginal product of labor, a situation Robinson viewed as the exploitation of labor, in contrast to the Marxist definition of labor exploitation as the payment to labor of less than the total product.
