Monopsony is the “flip side” of monopoly. In monopoly, a firm is the sole seller of product to a group of consumers. Thus, the monopolist faces a downward sloping demand curve for its product. Every unit of output the firm produces reduces the market price for its good. This implies that the more goods the monopolist sells, the lower the monopolist’s price. This in turn implies that selling an additional unit may be costly to the monopolist, and possibly result in a reduction of revenue at the margin (or “marginal revenue”) to the monopolist. Thus, a monopolist will set output so that price is higher and quantity lower than the competitive outcome. This, in turn, creates deadweight loss, as not all the goods that could ...

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