Monopsonistic competition, trade, and the profit share*

Abstract

I present a tractable international trade model of monopsonistic competition and heterogeneous firms, in which markups and markdowns are increasing with the size of firms. The model sheds new light on the effects of trade on the aggregate profit share. In a standard model with a Pareto distribution of firm characteristics, the profit share is constant; by augmenting the model with the assumption of monopsonistic competition, trade can increase the profit share under reasonable assumptions for the parameter values. Monopsonistic competition is, thus, a contributing factor to the documented decline in the labor share and rise in corporate profits.

Asymmetric market power and wage suppression

“…The literature acknowledges the rarity of such an extreme market scenario but provides both theoretical explanations for the emergence of considerable market power wielded by firms and a rigorous quantitative assessment of the magnitude of such monopsony power. For a small (yet far from complete) sample of the voluminous body of work on imperfect competition in labor markets, see the studies by Burdett and Mortensen (1998), Falch and Strom (2007), and Macedoni (2022), and the three review articles Boal and Ransom (1997) and Manning (2011Manning ( , 2021, along with the references therein. A common explanation for presence of monopsony power is related to the existence of search and matching frictions; see Rogerson et al (2005) for a comprehensive survey.…”