Imperfect Labor Markets
If wages are determined in a competitive market, a firm will hire labor until MRPL = W. But if the firm enjoys some market power in the product market, marginal revenue product will be less than the value of the marginal product because MR < P. The difference between the value of the marginal product and marginal revenue product is known as monopolistic exploitation of labor.
A monopsony is a market with a single buyer or employer. Marginal factor cost (MFC) is the added cost associated with hiring 1 more unit of labor. For the monopsonist, the MFC curve lies above the supply of labor curve because the firm must increase the wages of all workers to attract added labor. A monopsonist, which is a competitor in the product market, hires labor up to the point at which VMPL = MFC > W. At this point, the value of labor’s marginal product exceeds the wage rate; economists refer to this as monopsonistic exploitation of labor.