Question

• How is wage compensation different between a competitive market versus a monopsony?
• Why was the market for professional athletes monopsonistic before the 1970’s?
• Explain what factors led to the market for professional athletes becoming more competitive after the 1970’s.
• How did researchers test whether the market for professional athletes was competitive?

Here is the article to answer the question from:

Reading- Monopoly and Monopsony- A ComparisonFile

Please do not use outside sources, other than this article

Answer 1

1.) How is wage compensation different in monopsony then competitive market?

In competitive market a profit maximizing firm equates the MRP = P but a monopsonist in order to maximize his profit, equates the marginal revenue product to marginal factor cost which is less than P. Thus, wage compensation in monopsony is less than wage compensation in competitive market. This happens because of monopsony power available due to facing upward sloping supply curve of factors in factor market.

2.) Why was the market for professional athletes monoponistic before 1970 ?

This was due to the fact that prior to 1970 athletes were playing under the terms of the "reserve clause", which specified that a player was "owned" by his team. Once a team has acquired a players contract, the team could sell, trade, retain or dismiss the player. Unless the team dismissed him, the player was unable to offer his services for competitive bidding by other teams. It is because of this fact teams at that time had monopsony power in their hand and hence were able to pay less wage compensation than the MRP.

3.) Explain what factors led to market for professional athletes becoming more competitive after the 1970's ?

Since the late 1970's, there has been a major shift in the rules that govern relationship between professional athletes and the owners of the sports teams. This shift turned the once monopsonistic market into a competitive one. The first and foremost thing was the abandonment of the reserve clause system as some baseball players filled PIL in the court against this system. When the reserve clause was abandoned , players salaries shot up just as economic theories predicts. Players started to get their MRP as market became more competitive. Then in 1993, 484 basketball players were released into market as free agents and those players received pay increase upto 100%. In 1998 Football players who were working in the monopsony market were allowed free agency status each year. All of these events one after other in different categories led to market for professional athletes into a competitive one.

4.) How did researchers test whether the market for professional athletes was competitive?

I will answer the general case so that you can answer for yourself for a particular market to be competitive or not.To check whether a factor market is competitive or not is to check for whether the factors are getting paid their MRP or not. If they do then the market is said to be perfectly competitive otherwise the market is said to be imperfect. Since in perfectly competitive market a profit maximizing firm always pays the MRP to the factors of production. The same analysis can be applied in this particular case also.