Asymmetric market power and wage suppression

• Published date: 01 January 2024
• Author: Tomer Blumkin,David Lagziel
• Date: 01 January 2024
• DOI: http://doi.org/10.1111/sjoe.12545

Scand. J. of Economics 126(1), 38–59, 2024

DOI: 10.1111/sjoe.12545

Asymmetric market power

and wage suppression

Tomer Blumkin†

Ben-Gurion University of the Negev, Beer-Sheva 8410501, Israel

tomerblu@bgu.ac.il

David Lagziel

Ben-Gurion University of the Negev, Beer-Sheva 8410501, Israel

davidlag@bgu.ac.il

Abstract

We study a labor market in which two identical firms compete over a pool of homogeneous

workers. Firms pre-commit to their outreach to potential employees, either through their

informative advertising choices, or through their screening processes, before engaging in a wage

(Bertrand) competition. Although firms are homogeneous, the unique pure-strategy equilibrium

is asymmetric: one firm maximizes its outreach whereas the other compromises on a significantly

smaller market share. The features of the asymmetric equilibrium extend to a general oligopsony

with any finite number of firms.

Keywords: Asymmetric market power; oligopsony; outreach; tacit collusion

JEL classification:D82; E24; J30; J31; J71

1. Introduction

There is now growing empirical evidence alluding to substantial monopsony

power possessed by individual firms in the labor market. Manning (2003) and

Webber (2015), amongst others, provide evidence based on UK and US data,

suggesting that individual firms are faced with upward-sloping labor supplies

with fairly low elasticity levels, in the range between 0.7 and 1.8, varying

by industries. The lack of competition could manifest itself through various

channels, including, inter alia, low rates of union membership, incorporation

of non-compete clauses in labor contracts, search frictions, and limited

geographic mobility.1The evidence provides a possible explanation for the

documented persistent decline in the labor share: individual firms exercise

their market power to set wages below the marginal product of labor, giving

rise to wage markdowns (see Webber, 2015; Cengiz et al., 2019).

†Also affiliated with CESifo and IZA.

1For further discussion, see Krueger (2018) and Azar et al. (2022), amongst others.

c

2023 The Authors. The Scandinavian Journal of Economics published by John Wiley & Sons Ltd on behalf of F¨

oreningen

f¨

or utgivande av the SJE.

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution

and reproduction in any medium, provided the original work is properly cited.

T. Blumkin and D. Lagziel 39

A recent study by Azar et al. (2022) offers a complementary explanation

for the documented wage suppression. The study provides compelling and

robust estimates for a causal negative equilibrium relationship between

market-level concentration, measured by the Herfindahl–Hirschman Index

(HHI), calculated based on the share of vacancies and posted real wage rates.

In their instrumented (IV) specification, Azar et al. (2022) report a 17 percent

decline in posted wages in response to a shift from the 25th to the 75th

percentile in the extent of concentration. They further show that, on average,

labor markets are highly concentrated: an average HHI of 3,157, exceeding

the 2,500 threshold for a high degree of concentration.2These findings allude

to an important feature that apparently contributes to the documented high

degree of labor market concentration: an asymmetric fragmentation of the

market. The average number of firms in their sample is 20 (see their table 2),

whereas the average HHI of 3,157 is roughly equivalent to a symmetric

oligopsony of three firms. Thus, in many of the local labor markets analyzed,

concentration is driven not only by a small number of competing firms, but also

by the existence of dominant firms possessing substantially high market shares.

The goal of the current study is to provide a theoretical explanation

for the emergence of “natural” dominant firms in labor markets in line

with the asymmetric patterns observed in the data, and to further explore

the implications for wage suppression. To do so, we augment the classical

Bertrand model (where firms simultaneously post wage offers) by introducing

a preliminary stage in which firms set their outreach levels. Specifically, we

consider a two-stage game of a duopsonistic competition between two identical

firms competing over a large pool of homogeneous workers. In the first stage,

each firm strategically chooses its outreach to potential employees, either

through its informative advertising policy, or through its screening process.

In particular, each firm chooses, simultaneously, a fraction of the workers’

population to which it will extend a job offer during the second stage. A typical

job offer is extended to a single worker specifying a single-period wage rate.

We allow for wage dispersion at the firm level, so job offers may differ across

workers. It is further assumed that job offers are not targeted and, plausibly,

are uncoordinated between the firms. A worker that is approached by at least

one firm accepts the job offer, or chooses the better one in case both firms

provide independent offers. A worker that receives no job offers remains idle.

We show that the unique pure-strategy subgame perfect Nash equilibrium

(SPNE) of the two-stage game features asymmetric patterns despite the fact

that firms are assumed to be ex ante identical. The market divides into a large

firm, which maximizes its outreach, and a smaller firm, which compromises

2Based on the US Department of Justice and Federal Trade Commission horizontal merger

guidelines (https://www.ftc.gov/sites/default/files/attachments/mergers/100819hmg.pdf).

c

2023 The Authors. The Scandinavian Journal of Economics published by John Wiley & Sons Ltd on behalf of F¨

oreningen

f¨

or utgivande av the SJE.