Monopsony
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Monopsony is a situation in which there is only one buyer for a good or service in a market.[1]
Theory[edit]
A monopsony is not unlike a monopoly. Whereas a monopoly is the sole supplier, the monopsony is the sole buyer. The idea originated with economist Joan Robinson in her book The Economics of Imperfect Competition published in 1933. In the real world, there are few good examples of pure monopsonists, though they are often associated with company towns. Monopsonists have large amounts of market power and sellers have to accept whatever price they offer.
Minimum wage analysis[edit]
In theory a monopsony complicates more simplistic supply and demand models of minimum wage that simply suggest they cause unemployment. Because the firm can increase profits by not employing local workers it is reducing wages and output. Increasing the minimum wage encourages more people to work for it and boosts total output.[2]
There's a rather simple flaw in the model, of course. A real monopsony could artificially segment the workforce, in order to pay some workers more than others, keeping the marginal cost of new workers low. The single employer wouldn't necessarily need to give every worker a raise as new employees are hired, so long as the firm could make up a convincing story about why two equivalent jobs should pay different amounts, e.g., "We are opening a new janitorial position that pays more than your job, but your experience won't let you apply because you lack of BS in Custodial Studies". Under this scenario, employment would return to the equilibrium rate, although the monopsony would of course be exploiting their workforce.