Discussion paper

DP7981 The Distribution of Earnings under Monopsonistic/polistic Competition

Recent empirical contributions in labor economics suggest that individual firms face upward sloping labor supplies. We rationalize this by assuming that idiosyncratic non-pecuniary conditions interact with money wages in workers? decisions to work for specific firms. Likewise, firms supply differentiated goods in response to differences in consumer tastes. Hence, firms are price-makers and wage-setters. By combining monopolistic and monopsonistic competition, our setting captures general equilibrium interactions between the two markets. The equilibrium involves double exploitation of labor. Compared to the competitive outcome, the high-productive workers are overpaid under free entry, whereas the low-productive workers are underpaid. In the same vein, capital-owners receive a premium, whereas workers are exploited.


Thisse, J and E Toulemonde (2010), ‘DP7981 The Distribution of Earnings under Monopsonistic/polistic Competition‘, CEPR Discussion Paper No. 7981. CEPR Press, Paris & London. https://cepr.org/publications/dp7981