Conditions of MONOPSONY
A monopolistic situation, inter alia. may arise in the following ways:
(i) Units of a factory may become specialized to a particular use. Having become thus specific, they have no use for other purposes. For example. a of specialist skill may be developed to meet the requirements of a particular firm and no other firm has any use for it; or a big automobile manufacturer may be the sole purchaser of certain parts. In the film line, certain artists may be bound by agreement to work. for a certain produce only and cannot work for any other during the currency of the agreement.
(iil Monopsony may also arise owing to the immobility of a productive resource. For instance, a certain body of workers may be attached to a certain firm on account of emotional ties or caste considerations. Ignorance or dread of the unknown may keep them tied to a particular place or employer. They may. be too poor to seek jobs elsewhere. Seniority, provident fund or pension rights earned already do not permit the employees to leave. There is also geographical immobility. Under perfect competition, each firm maximises its profits by employing larger and larger quantities of the factor till the marginal revenue product of the factor is equal io the price paid for it. But a monopsonist maximises his profit by employing smaller quantity that would cqualise marginal re enue 0 its price per unit. That is. the marginal product exceeds the price and the factor cost too exceeds the price. Hence, factor units are paid less than what anyone of them contributes to the total receipts of the firm. In other words, the monopsonist restricts the quantity of the factor employed and keeps down the price that he pays. This is. how the factor -supplies are exploited by a monopsonist. ‘lhe Remedios. Is there any remedy to prevent this exploitation? Broadly speaking. two remedies are possible.
(i) The factor suppliers may organise themselves and they or the government may fix minimum prices for the supply of the factor exploited. The firms using these resources must be made to pay these minimum . price. The minimum price will not only eliminate exploitation but, if fixed at a reasonable level. may also increase the quantity of the factor used. If it is fixed too high, it will create unemployment of the resource. Fixing a correct price may not be so easy. Hence, collective bargaining on a firm to-fi’!l’ basis may be more appropriate.
(ii) Measures may be adopted to increase the mobility of the factor. In case of labour, where exploitation is general, steps can be taken to reduce geographical mobility by spreading information. improving transport or by subsidising migration; horizontal . mobility may be increased by facilitating transfer from one industry to another and vertical mobility by imparting technical and general education.