Monopsony, Price Squeezing, and Sub-optimality

Abstract

Monopsony has been a hot issue recently. A traditional view is that monopsony is harmless to consumers unless it results in higher prices downstream. In this study, I present a theoretical model in which the monopsonist may engage in price squeezing but cannot commit not to engage in advance. This lack of commitment (holdup problem) leads to two types of sub-optimality: (i) the monopsony reduces intermediate-good producers incentive for relationshipspecific investments, leading to sub-optimal investments and lowered wages, and (ii) the monopsonist may choose vertical overintegration