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EconomicsPart of Economic, Social and Political Science

2101 Joint Oligopoly-Oligopsony Model with Wage Markdown Power (Jian Tong and Carmine Ornaghi)

Discussion Paper 2101, "Joint Oligopoly-Oligopsony Model with Wage Markdown Power", by Jian Tong and Carmine Ornaghi


In imperfectly competitive markets, a producer-employer firm can be considered monopolist-monopsonist, facing downward sloping residual demand for product and upward sloping residual supply for labour. Firms can thereby exercise both product price markup and wage markdown powers.

To study market outcomes in this setting, we define a Joint Oligopoly-Oligopsony Model - an extended Cournot oligopoly model with imperfectly competitive labour market - and investigate its welfare implications. We show that wage markdown power affects both firms’s input mix - driving substitution of labour with non-labour variable inputs - and the scales of inputs (including employment) and output. By introducing Worker Surplus into our welfare analysis, our model clarifies the potentially efficiency-enhancing function of labour union and minimum wage regulation, aimed at curbing oligopsony wage markdown power. Furthermore, we show that competition policy and minimum wage regulation are complements, not substitutes: a lax merger control, which permits consolidation of market structure, can weaken worker power by way of reducing efficient minimum wage, as well as employment. Finally, we investigate the effects of ‘superstar firms’ on market outcomes, allowing the superior efficiency of superstar firms to be a common cause of market concentration and pricing power.

Our theory explains the rise of average labour productivity, the fall of labour income share and wage stagnation at industry level.

It also shows that the superstar firm phenomenon produces an ambiguous welfare effect once worker welfare is taken into consideration.

Keywords: market power, monopsony, oligopsony, markdown, market structure, worker welfare, worker surplus, labor market, minimum wage

JEL Classification: D21, D33, D43, D6, E24, J2, J3, L13, L4

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Discussion paper 2101




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