Question

A What would happen to movie stars' wages if all major film studios merged into a single firm, creating a monopsony for film actors?

B if workers became more productive (that is, produced more output in the same amount of time), what would happen to the demand for labor, the wages of labor, and the number of workers employed?

Answer 1

The question is more or less is consfusig. Here in the first sentence you mentioned the films studios are merging in to one firm. In the second you metion that they are creating a monopsony of actors. Here the film studios are manufactures of movies and stars are the actors. It may be a mistake in question.

Take the case where the film studios are creating a monopsony.

Monopsony

A monopsony is referred to as monopoly of buyers. In contrast to monopoly the seller is not controlling the market but the buyer. So it is generally termed as buyer’s monopoly. In a monopsony a large buyer but not a seller controls the market and brigs the prices down. A single firm has the market power over the factors of production. Sometimes the firm is the purchaser of different sellers and brings down the price of different sellers.

In a monopsony situation the sellers often indulge in price war to get the business of single buyer which effectively low downs the price and increasing the quantity. The seller caughted in a monopsony market losing their previous power over supply.

Most commonly monopsony occurs when a single employer controls the entire labour market. In this case the sellers are the potential employees competing for a few jobs available and accept low wages which inturn reduce the cost of business of the employer.

The film manufacturing industry is the typical example of monopsony. They need directors, actors cameramen, choreographer, make up man, and other technicians to produce a film. If all the film industries are merged into a monopsony they will have control over the price of actors and technicians etc.

Monopsony Power

A monopsony has buying or bargaining power of the factors or products. A monopsony may be a buyer of a factor or a product. He may have complete control over the price of the factor of product.

The monopsony can exploit the bargaining power of the sellers and negotiate to a lower price.

A monopsony may exist in a product market or a labour market.

Here we discuss the effects of monopsony in a labour market.

1. Unlike the perfectly competitive market, under monopsony, firms does not hire all the workers it want at the equilibrium market wage rate.

2. The monopsonist face an upward supply curve of labour. If it wants to increase the number of workers it can do it only at a higher wage.

3. If monopsony exist in labour market, the dominant monopsonist is able to determine the price of labour

4. A monopsonist will hire labour where marginal cost of labour(MCL) is equal to the marginal revenue product(MRP) of the labour

If the monopsonist wants to hire more, it has to offer a higher wage.

As the monopsonist hire more workers, the marginal cost of additional worker increase. Thus the monopsonist will not have a tendancy to hire labours at a higher wage. The absence of competition gives complete control over the production to the monopsonist.

If the monopsonist firm wants to maximise profit, it will hire labour up to the point where the marginal cost of labour is equal to the marginal revenue product of labour. Therefore it will use labour up to level of OM which is where MCL=MRPL. In order to entice workers to supply this amount of labour, the firm need pay only the wage OW1. The difference between OW and OW1 is backed by the monopsonist. You can see, therefore, that a profit-maximising monopsonist will use less labour, and pay a lower wage, than a firm operating under perfect competition.

To sum up if all the film studios are joined together and form a monopsony, definitely the actors will not have any bargaining power and they have to act according to the remuneration fixed by their producers.

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