How is wage compensation diffe

1.) How is wage compensation different in monopsonythen competitive market?

In competitive market a profit maximizing firm equates the MRP =P but a monopsonist in order to maximize his profit, equates themarginal revenue product to marginal factor cost which is less thanP. Thus, wage compensation in monopsony is less than wagecompensation in competitive market. This happens because ofmonopsony power available due to facing upward sloping supply curveof factors in factor market.

2.) Why was the market for professional athletesmonoponistic before 1970 ?

This was due to the fact that prior to 1970 athletes wereplaying under the terms of the “reserve clause”, which specifiedthat a player was “owned” by his team. Once a team has acquired aplayers contract, the team could sell, trade, retain or dismiss theplayer. Unless the team dismissed him, the player was unable tooffer his services for competitive bidding by other teams. It isbecause of this fact teams at that time had monopsony power intheir hand and hence were able to pay less wage compensation thanthe MRP.

3.) Explain what factors led to market forprofessional athletes becoming more competitive after the 1970’s?

Since the late 1970’s, there has been a major shift in the rulesthat govern relationship between professional athletes and theowners of the sports teams. This shift turned the oncemonopsonistic market into a competitive one. The first and foremostthing was the abandonment of the reserve clause system as somebaseball players filled PIL in the court against this system. Whenthe reserve clause was abandoned , players salaries shot up just aseconomic theories predicts. Players started to get their MRP asmarket became more competitive. Then in 1993, 484 basketballplayers were released into market as free agents and those playersreceived pay increase upto 100%. In 1998 Football players who wereworking in the monopsony market were allowed free agency statuseach year. All of these events one after other in differentcategories led to market for professional athletes into acompetitive one.

4.) How did researchers test whether the market forprofessional athletes was competitive?

I will answer the general case so that you can answer foryourself for a particular market to be competitive or not.To checkwhether a factor market is competitive or not is to check forwhether the factors are getting paid their MRP or not. If they dothen the market is said to be perfectly competitive otherwise themarket is said to be imperfect. Since in perfectly competitivemarket a profit maximizing firm always pays the MRP to the factorsof production. The same analysis can be applied in this particularcase also.