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Factor Markets with Monopoly Power:Monopoly Power of Sellers of Labor

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Microeconomics ­ECO402
VU
­
Lesson 45
Factor Markets with Monopoly Power
Just as buyers of inputs can have monopsony power, sellers of inputs can have monopoly
power.
The most important example of monopoly power in factor markets involves labor unions.
Monopoly Power of Sellers of Labor
When a labor union is a monopolist, it
chooses among points on the buyer's
Wage
demand for labor curve.
per
worker
The seller can maximize the number of
workers hired, at L*, by agreeing that
workers will work at wage w*.
SL
A
w*
DL
MR
L*
Number of Workers
Monopoly Power of Sellers of Labor
The quantity of labor L1 that maximizes the rent that
Wage
employees earn is determined by the intersection of
per
the marginal revenue and supply or labor curves;
worker
union members receive a wage rate of w1.
Finally, if the union wishes to maximize total wages
w1
paid to workers, it should allow L2 union members to
be employed at a wage rate of w2 because the
orginal revenue to the union will then be zero.
w2
SL
Economic
A
Rent
w*
DL
MR
L*
L1
L2
Number of Workers
The primary determinant of controlling wage and economic rent is controlling the supply of
labor
A Two-Sector Model of Labor Employment
­ Union monopoly power impacts the nonunionized part of the economy.
202
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Microeconomics ­ECO402
VU
Wage Determination in Unionized & Nonunionized Sectors
When a monopolistic union
S
Wage
raises the wage rate in the
per
unionized sector of the
worker
economy from w* to wU,
employment in that
sector falls.
For the total supply of labor to
w
remain unchanged, the wage in
the nonunionized sector
must fall from w* to wNU..
w
wN
DN
D
D
Number of Workers
ΔLMU
ΔLU
Bilateral Monopoly
­ Market in which a monopolist sells to a monopsonist.
Wage
per
worker
ME
25
SL = AE
20
19
wC
15
Wage
Possibilitie
DL = MRPL
10
MR
5
Number
10
20
25
40
of Workers
Observations
­ Hiring without union monopoly power
· MRP = ME at 20 workers and w = $10/hr
­ Union's objective
· MR = MC at 25 workers and w = $19/hr
Who Will Win?
The union will if its threat to strike is credible.
The firm will if its threat to hire non-union workers is credible.
If both make credible threats the wage will be
203
Table of Contents:
  1. ECONOMICS:Themes of Microeconomics, Theories and Models
  2. Economics: Another Perspective, Factors of Production
  3. REAL VERSUS NOMINAL PRICES:SUPPLY AND DEMAND, The Demand Curve
  4. Changes in Market Equilibrium:Market for College Education
  5. Elasticities of supply and demand:The Demand for Gasoline
  6. Consumer Behavior:Consumer Preferences, Indifference curves
  7. CONSUMER PREFERENCES:Budget Constraints, Consumer Choice
  8. Note it is repeated:Consumer Preferences, Revealed Preferences
  9. MARGINAL UTILITY AND CONSUMER CHOICE:COST-OF-LIVING INDEXES
  10. Review of Consumer Equilibrium:INDIVIDUAL DEMAND, An Inferior Good
  11. Income & Substitution Effects:Determining the Market Demand Curve
  12. The Aggregate Demand For Wheat:NETWORK EXTERNALITIES
  13. Describing Risk:Unequal Probability Outcomes
  14. PREFERENCES TOWARD RISK:Risk Premium, Indifference Curve
  15. PREFERENCES TOWARD RISK:Reducing Risk, The Demand for Risky Assets
  16. The Technology of Production:Production Function for Food
  17. Production with Two Variable Inputs:Returns to Scale
  18. Measuring Cost: Which Costs Matter?:Cost in the Short Run
  19. A Firm’s Short-Run Costs ($):The Effect of Effluent Fees on Firms’ Input Choices
  20. Cost in the Long Run:Long-Run Cost with Economies & Diseconomies of Scale
  21. Production with Two Outputs--Economies of Scope:Cubic Cost Function
  22. Perfectly Competitive Markets:Choosing Output in Short Run
  23. A Competitive Firm Incurring Losses:Industry Supply in Short Run
  24. Elasticity of Market Supply:Producer Surplus for a Market
  25. Elasticity of Market Supply:Long-Run Competitive Equilibrium
  26. Elasticity of Market Supply:The Industry’s Long-Run Supply Curve
  27. Elasticity of Market Supply:Welfare loss if price is held below market-clearing level
  28. Price Supports:Supply Restrictions, Import Quotas and Tariffs
  29. The Sugar Quota:The Impact of a Tax or Subsidy, Subsidy
  30. Perfect Competition:Total, Marginal, and Average Revenue
  31. Perfect Competition:Effect of Excise Tax on Monopolist
  32. Monopoly:Elasticity of Demand and Price Markup, Sources of Monopoly Power
  33. The Social Costs of Monopoly Power:Price Regulation, Monopsony
  34. Monopsony Power:Pricing With Market Power, Capturing Consumer Surplus
  35. Monopsony Power:THE ECONOMICS OF COUPONS AND REBATES
  36. Airline Fares:Elasticities of Demand for Air Travel, The Two-Part Tariff
  37. Bundling:Consumption Decisions When Products are Bundled
  38. Bundling:Mixed Versus Pure Bundling, Effects of Advertising
  39. MONOPOLISTIC COMPETITION:Monopolistic Competition in the Market for Colas and Coffee
  40. OLIGOPOLY:Duopoly Example, Price Competition
  41. Competition Versus Collusion:The Prisoners’ Dilemma, Implications of the Prisoners
  42. COMPETITIVE FACTOR MARKETS:Marginal Revenue Product
  43. Competitive Factor Markets:The Demand for Jet Fuel
  44. Equilibrium in a Competitive Factor Market:Labor Market Equilibrium
  45. Factor Markets with Monopoly Power:Monopoly Power of Sellers of Labor