An economic agent who is the sole buyer of all the available supply of an input is called a monopsonist. We discuss two categories of monopsonists: the pure monopsonist and the perfectly discriminating monopsonist.

Pure Monopsonist

In analogy to the monopolist treatment, we discuss the pure monopsonist's behavior assuming that she will be the sole buyer of a vector of inputs. Let ps = g + Gs be such a vector of inverse linear supply functions, where s is a (m × 1) vector of quantities of inputs purchased by (supplied to) the monopsonist, the matrix G is a (m × m) matrix of price/quantity slopes in the input supply functions, the vector g contains intercept coefficients and ps is a (m × 1) vector of input prices. We assume that the matrix G is symmetric and positive definite. In analogy to the monopolist, the monopsonist “owns” the input supply functions.

In order to concentrate on the pure monopsonist's behavior, we assume that this economic agent is a price taker on the output markets and produces her outputs by means of a linear technology. The decision of the pure monopsonist is to find the optimal quantities of inputs to purchase on the market and to find the optimal quantity of outputs to produce in such a way to maximize profit. Total revenue of the price-taking entrepreneur is defined as TR = c′x, where c is a (n × 1) vector of market prices for the outputs, which are represented by the vector x, conformable to the vector c.