The relevant decision variables for this monopolist

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Unformatted text preview: MR LU C D Lc L [c] On the other hand, the firm acting as a monopsonist in the labour market faces an upward sloping supply curve of labour and the corresponding marginal expenditure on labour curve, MEL. The relevant decision variables for this monopsonist are the marginal expenditure on labour (cost side) and the labour demand (viewed in terms of its MRP) on the benefit side. The optimal decision for the firm is the intersection point (point 2) of the marginal expenditure on labour, MEL, and the MRP curve. The optimal wage offered by the firm is wF and the corresponding quantity of labour demanded is LF (point F). w MEL S 2 wU U wc F C wF D = MRP LF LU Lc L 68 [d] The optimal decisions for the monopolist (labour union) and the monopsonist (firm) are not compatible with each other. While the labour union requires a higher wage, wU, with a higher employment level, LU (see point U), the firm is offering a lower wage, wF, with a lower employment level, LF (see point F). We should notice that the competitive equilibrium wage, wc (point C) lies between these two extreme wages determined by the labour union and the firm: wF [firm monopsonist] wc [competitive equilibrium] wU [union monopolist] As well, we should notice that both of the employment levels determined by the firm and the labour union are below the competitive employment level, Lc. LF [firm monopsonist] LU [union monopolist] Lc [competitive equilibrium] So, the bilateral monopoly solution is indeterminate in the sense that the wage rate, wF, and employment level, LF, offered by the firm are not matched by the wage rate, wU, and employment level, LU, required by the labour union. The discrepancy in the wage rates determined by the labour union and the firm can be eliminated (?) through the process of collective bargaining negotiations. The outcomes of this negotiation process can best be analyzed by using game theory...if we have time at the end of the course, we may return to this issue in the context of game theory. For now, we just want to notice the conditions that give rise to the need for labour negotiations. w MEL S = M...
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This note was uploaded on 05/25/2010 for the course ECON 301 taught by Professor Sning during the Spring '10 term at University of Warsaw.

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