April 5, 2018 / 2:08 PM / 10 months ago

Breakingviews - Hadas: Monopsony money

LONDON (Reuters Breakingviews) - About a century ago, the evils of monopoly inspired an eponymous board game. Is it now time for a new variation? Monopsony, a term coined in the 1930s, refers to markets where a single buyer is dominant. The Monopsony game would hinge on all-powerful employers determining how much they will pay their workers.

A Monopoly board game by Hasbro Gaming is seen in this illustration photo August 13, 2017. REUTERS/Thomas White/Illustration

If the new game’s designers wanted to consult an expert, their first choice would probably be Eric Posner. The University of Chicago law professor argues that increasing monopsony in different segments of the labour market is damaging the U.S. economy. Not only does the concentration of power depress wages, but, according to Posner and the distinguished economists he works with, it also discourages technical innovation and restrains hiring.

Posner’s strongest case is against contracts which restrict employees from leaving to work with competitors. Such non-compete agreements are standard at many companies, from retail giant Amazon to sandwich franchise Jimmy John’s. Thorough studies by Evan Starr of the University of Maryland show that these restrictions do indeed tend to keep wages down.

Posner also dislikes non-poaching arrangements among employers. His reasoning is sound, but the practice of refusing to hire from rivals is not prevalent enough to do much harm.

More ambitiously, he cites studies which purport to show that the reduction in the number of alternative employers in some industries and regions has reduced skilled workers’ pay. That is possible, but not likely. More concentrated industries tend to be led by large and successful companies. Studies from around the world show that these are enterprises which typically offer relatively high pay.

That would suggest that intensifying competition is the wrong way to increase overall pay. A more promising approach may be to have governments act as beneficent monopsonists. Increases in the legal minimum wage tend to push up all low wages. In regions with few employers, well-paid government jobs can set the standard for private companies fishing in the same talent pool.

Relying on government may not appeal to U.S. economists, but international experience and expertise are relevant. Almost all developed economies have been dealing with the rise of powerful global firms, the shrinkage of local competition and the retreat of unions. Up to now, though, the anti-monopsony crusade has been all-American.

It’s true the American labour market is special. It lacks the European and Japanese traditions of regulation and cooperation – habits which sometimes extend to national and industry-wide agreements that limit downward pressure on wages.

Nonetheless, Posner and his fellow researchers may still be exaggerating the U.S. market evils caused by monopsony. It is hard to tell, since even the most valiant efforts at statistical analysis cannot definitively separate the effect of changes in the balance of power between employers and employees from forces like increased international competition for jobs, ageing and often shrinking labour forces, and rapid technological change.

While the role of monopsony is doubtful, the rise of corporate profitability is crystal clear. In the 1990s, total corporate profit in the United States averaged 5.4 percent of gross domestic product. Over the next decade, the ratio was 7.4 percent. Since 2010, it has been 9.6 percent.

The shift of power from labour to the providers of capital presumably contributed to this effect, but a different dynamic was more important: a power shift from consumers to producers. Companies’ control over the prices they charge is much stronger than their control over the wages they pay.

Internet intermediaries Alphabet unit Google and Facebook are extreme examples. These giants, which pay their workers very well, currently have almost no significant rivals. The most recent year’s operating-profit margins of around 30 percent and 50 percent respectively suggest that they charge accordingly.

Such quasi-monopolies are still rare, though. More often, there is just a lack of vigorous price competition. For example, airlines in the U.S. are now solidly profitable, after abandoning decades of crash-and-burn pricing. Industries such as software and pharmaceuticals never suffered the airlines’ losses, but still enjoy potent pricing power.

There is so little competition among American companies that cutting prices was not among the six most likely responses to a significant reduction in taxes, according to survey of chief executives by Bank of America Merrill Lynch last summer. That shows leading producers are essentially of one mind that they won’t woo each others’ customers with lower prices. Such agreements are not formal, since collusion on pricing is illegal in all developed economies. However, tacit cooperation is legal, as is collaboration on lobbying and standard-setting.

Economists have a name for an industry in which companies cooperate so well that they work almost like a single supplier: oligopoly. Oligopolistic behaviour is more visible and important in the contemporary economy than monopsony.

Oligopoly is also more economically relevant than the control of property at the centre of the old Monopoly game. It is time for a new product which makes a different polemical case – that constrained competition helps shareholders while hurting consumers. Whoever corners the market for the Oligopoly game could make a fortune.


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