Imperfectly Comeptitive Markets

1. Imperfectly Competitive Markets for
Factors of Production
"We are born in a Pullman house, fed from the Pullman shops,
taught in the Pullman school, catechized in the Pullman
Church, and when we die we shall go to the Pullman Hell.“
-An employee of the Pullman Car Company on strike.
Slide 1 of 28

2. A review of perfect competition
Recall in our last module, we discussed
perfectly competitive labor markets.
In those markets, employers used MRP
and MFC to determine how many
employees they’d hire
And these employers and employees
were price takers. In our example in that
module, they could hire as many
employees as they wanted at $6 per hour.
In this module, we’ review this idea of a
perfectly competitive labor market and
compare it to an imperfectly competitive
labor market.
Slide 2 of 28

3. The characteristics of a perfectly
competitive labor market
Characteristics of a perfectly
competitive labor market
Many firms compete with one another for
labor. None hire enough to influence the
wage rate.
There are numerous workers with nearly
identical skills.
Individual firms and workers are both
“wage takers”. Neither can dictate the
wage. A cashier may be
a good example!
Slide 3 of 28

4. The labor market for cashiers
The demand for labor will be the
sum of the individual firms’ labor
demand curves within that market.
The supply for labor will be based on
that market’s labor force.
Wal-Mart may demand a lot of
cashiers at a given wage rate while
a Mom & Pop hardware store may
need only one cashier.
As wages increase, workers are
more willing to work!
Slide 4 of 28

5. The market (if left alone) will
reach equilibrium
If wages start here
($10), supply will
exceed demand.
Some people will
leave the labor force.
If wages start here
($4), demand will
exceed supply.
Employers will bid up
prices to attract help.
Eventually an industry
wide equilibrium will
be found (in that
market).
Slide 5 of 28

6. Labor supply and demand in a purely
competitive market and within a firm
Labor Market for Cashiers Individual Firm
First, wages are set
by the labor market
Note that each
employer hires too
few workers to
influence the wage
rate.
That than becomes the
wage rate for perfectly
competitive firms and
workers, as they are both
price takers
Slide 6 of 28
MFC (=S)

7. But what if a labor market was not
perfectly competitive?
An example of a monopsonist
might be a factory at the center of
a “Company Town”
Characteristics of an imperfectly
competitive labor market
There is only one employer of a
particular type of labor.
That labor is relatively immobile. It is
had for employees to “leave town” in
search of better work.
The firm is a “price setter” or “wage
maker”.
When there is only one buyer of
a good or service, it is called a
“Monopsonist”
They are the only buyer of labor in
that town.
Slide 7 of 28

8. A monopsony in comparison to a
perfectly competitive labor market
Examples of Perfectly
Competitive Labor Markets
•Retail
•Restaurant services
•Car wash services
Examples of Imperfectly
Competitive Labor Markets
•Silver mines
•Textile mills
•End of the railroad
If you seek work in these
industries, there are many
employers and the wages are
set by the market.
If you seek work in these
industries, there may be only
one employer and they are
wage makers.
Slide 8 of 28

9. Monopsonists do have an impact on
wages-they are wage makers
Think of it this way: as an
employer in a company town
wants to hire more people,
they have to lure them there
with higher wages.
Recall:
That means the monopsonist’s
MFC curve is not perfectly
elastic. It is upward sloped!
Note the increasing wages. A
monopsonist is a wage maker.
As they hire more people, they
drive the wage up.
Slide 9 of 28

10. The monopsonist’s
hiring decision
Much like perfectly competitive
labor markets, a monopsonist
uses the MRP=MFC rule when
making the hiring decision.
For this monopsonist, the first
employee’s MRP>MRC. They
are a good hire!
For this monopsonist, the 2nd
employee’s MRP>MRC. They
are a good hire!
For this monopsonist, the 3rd
employee’s MRP=MFC. That
is the last attractive hire!
Slide 10 of 28
This shows another example
of a firm making a decision
based on marginal costs and
marginal benefits!

11. The monopsonist’s
wage decision
For three workers,
enough labor will be
provided at $8. That is
the least the Monopsonist
can pay! Again, we see
market power that leads
to exploitation.
For this monopsonist, we have
determined that they will hire
three employees.
But what will they pay them?
In a perfectly competitive labor
market, the wage is set by the
market and both employer and
employee is a wage taker.
But much like a
monopolist, this
monopsonist has
market power and
can exploit the
market- they can
pay low wages.
Slide 11 of 28

12. Let’s take a closer look at this…
The monopsonist has
determine the he or she
will hire three people.
Imagine you are a worker
and you are employed for
this monopsonist.
Three
people are
willing to
supply labor
at $8 per
hour.
But their
contribution
…what they
are
worth…their
MRP…is
$12 an hour!
You are being exploited.
As the only buyer of your
labor the monopsonist
has market power.
Don’t forget – there is
only one employer, and
labor is immobile. You
are stuck with few
options.
Slide 12 of 28

13. Some historic monopsonist
examples are extreme
• In 1854, Sharpe, Leisenring and Company (S. L. & Co.)
seeks to exploit anthracite coal from rural Pennsylvania
• To house the workers, S.L. & Co built Eckley, PA
• Eckley was one of many “Patchtowns” that popped up in
order to extract coal. In those towns, they were the only
employer.
• By 1870’s Eckley had 1,500 residents
• S. L. & Co built the stores and other buildings, and of course
controlled them all
• Since there was only one employer, workers were at the
mercy of the mine owner for pay and for the provision of food
and tools
• The monopsonist had the market power!
Eckley
Est. 1854
Slide 13 of 28

14. Getting them on both ends
Monopsonist
(Textile Mill owner)
Labor
Wages
Mill Workers
Company Store
Profit
Rent
In the end, the
monopsonist got it all.
Company Housing
Hotel, Doctor’s office,
Saloon Slide 14 of 28

15. A worker’s viewpoint of
conditions in a town like Eckly
Sixteen Tons
Sang by Merle Travis (1946)
Some people say a man is made outta mud
A poor man's made outta muscle and blood
Muscle and blood and skin and bones
A mind that's a-weak and a back that's strong
You load sixteen tons, what do you get?
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store
In some cases, those employed
by a monopsonist had a tough
life.
Take a look at the words to this
song, which might summarize
living conditions.
Slide 15 of 28

16. Others monopsonists
weren’t strictly profit oriented
• George Pullman found Pullman, Ill in 1880
• It was a company town complete with stores,
churches, schools, and hotels
• Houses were nice (for the day) and people fought
for jobs at the Pullman Palace Car Company
• In a social engineering experiment, he allowed no
liquor sales, no prostitutes, and only churches of
certain religions
• As a recession weakened the economy, wages
were cut and employee moral fell
• It ended with riots and bloodshed.
George Pullman
Pullman Palace Car
Slide 16 of 28

17. Modern monopsonies
• Fortunately, monopsonies are not common
today, but they do still exist
If you want to work in a
specific geographic
area or a specific
industry, you may find
there is only one buyer
of your labor.
For example, if you
want to work in a
space program, NASA
may be your only
chance.
Can you
think of any?
Slide 17 of 28

18. Simply put, laborers had no market power
• A sample of work conditions
in 1880:
– work ten to twelve hours straight
six days a week with a half a day
off on Sunday
– Workers toiled amid deafening
noise, choking coal dust or lint,
and overwhelming heat and
humidity and lots of danger
– Life expectancy for some miners was as low as 13 months
– Employers paid low wages and would hire children to “help
families make ends meet.”
– Children entered full time labor at age 12
These might have been employees
Slide 18 of 28

19. Workers tired of these conditions
Molly Maguire’s
• In some cases they resorted to
violence.
• Oppressed workers began to
organize and fight back.
• In one example, a group of Irish
miners called the Molly Maguire's
threatened bosses for safer jobs
and killed middle management or
owners in an attempt to wield power
But with no market power, what could they do?
Slide 19 of 28

20. But how?
Eventually workers
sought to grab market power
Unions are a good tool to combat a monopsonist’s power
Today’s unions
are still powerful
although there
numbers have
been in declineSlide 20 of 28

21. How do unions achieve their goals?
Unions typically use one of three strategies
Increasing Demand -
such as a buy American
Campaign
Inclusivity - such as
AFL - CIO
More on these in the next few slides…
Exclusivity - such as the
American Bar Association
Slide 21 of 28

22. In the best case, unions increase
demand for their services
• Unions can increase
product demand through a
“Buy Union Campaign”
• Unions can lobby political
leaders for government
contracts
• Unions can lobby
employers for additional
equipment thereby making
them more productive
• Unions can influence
prices of other products
(through tariffs and
minimum wage).
If unions cause demand to go
up, the wages and quantity of
labor increase. That is the
perfect scenario.
Slide 22 of 28

23. Exclusivity – Keeping people out
• Restrict employment through
lobbying (for example, policy
change could reduce
immigration or make child
labor illegal.)
• Require certifications to
practice thereby limiting
supply of labor (also protects
consumers)
• Require long apprenticeships
to discourage new
competition
• Examples include the AMA
(American Medical
Association) or the American
Bar Association
Here, the union has increased
wages. Unfortunately, they
have also reduced the number
of workers.
Slide 23 of 28

24. Inclusivity – adding lots of members
Ordinarily, a worker
in this field would
be paid at this level
Qd’ Qd
S’
In effect, they are
“bending” the
supply curve.
Unfortunately, this strategy
also results in a restriction
of employmentBut if virtually all
labor in a field can
be organized, then
they can demand
higher wages.
Slide 24 of 28

25. To work, inclusive unions need to get big
Examples include:
AFL-CIO (American Federation of Labor
and Congress of Industrial Organizations):
10 million members
NEA (National Education Association):
3 million members
TIAA CREF (Teachers Insurance and
Annuity Association - College Retirement
Equities Fund): 3 million members
S’
And this strategy only works if you
involve all the workers. Therefore,
these unions have to be BIG.
Slide 25 of 28

26. What happens when inclusivity
meets monopsony?
Unions will press for this
wage ($12/hr)
The monopsonist(s) will press
for this wage ($8/hr).
The wage will likely be
between and will be
based on bargaining,
power, and strategy.
Notice how the
two market forces
cancel each other
out and the wage
winds up near the
perfectly
competitive level.
Each has control.
One force
controls labor
supplied. One
controls labor
demanded. This
is called a
bilateral
monopoly.
Slide 26 of 28

27. In Summary
Monopsonists still make the hiring
decision by analyzing MRP and MFC.
However, they are the lone buyer of that
labor – the Labor maker is imperfectly
competitive.
As a result, they are price setters- they
select the wage as opposed to taking the
market wage.
That allows them to exploit
workers…especially if that labor is
immobile.
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28. Credits
Slide 1:https://commons.wikimedia.org/wiki/File:Pullman_car_exterior.jpg
Slide 4: http://www.flickr.com/photos/bioversity/8554603872/
Slide 7: https://commons.wikimedia.org/wiki/File:Friedrich_Witte_Fabrik.jpg
Slide 14: http://commons.wikimedia.org/wiki/File:Former_textile_mill,_now_converted_for_residential_use_-
_geograph.org.uk_-_450032.jpg, http://www.flickr.com/photos/documentingtrees/199211935/’
Slide 16: https://commons.wikimedia.org/wiki/File:Gpullman.jpg,
https://commons.wikimedia.org/wiki/File:Pullman_car_exterior.jpg
Slide 17: http://www.flickr.com/photos/fragilebreath/33416329/, http://commons.wikimedia.org/wiki/File:Nasa-
logo.gif, http://commons.wikimedia.org/wiki/File:It_is_the_logo_of_Pawar_Public_School.png
Slide 18: http://www.flickr.com/photos/53035820@N02/5179960789/
Slide 19: https://commons.wikimedia.org/wiki/File:New_York_Draft_Riots_-_fighting.jpg
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