9. “Exploitation” of Labor—“Oligopsony”

IT WAS argued in the previous chapter that, if monopsonistic exploitation of labor is feared, the obvious defensible remedy is dissolution of collusive practices, not the encouragement of a supposedly countervailing monopoly. It is, I think, because academic defenders of the strike-threat system recognize the possible force of such an argument that they often suggest that the problem arises not because of formal collusion between firms, or by reason of any natural monopsony, but through an inevitable tacit monopsony or “oligopsony” as it is called. But every consideration we have noticed in discussing monopsonistic exploitation is relevant to an understanding of oligopsonistic exploitation; for oligopsony is simply a weaker form of monopsony. If cases of undoubted exploitation of labor through the abuse of monopsonistic power are difficult to find, even in the form of quite open and explicit lock-in contracts, how much more unlikely it is that we shall be able to find genuine cases of oligopsonistic abuse.¹ Nevertheless, for the sake of readers who are disinclined to accept what is merely apparent, I propose to examine the notion that it is possible for an oligopsonistic situation to arise and operate against the workers’ interests (as indeed Adam Smith believed it did).

We can best approach the possibilities by first envisaging oligopolistic and oligopsonistic incentives together; for the question here at issue is ultimately whether informal understandings, as distinct from open or secret agreements, can “shut-in” or “shut-out” resources, preventing them from entering or leaving any firm, activity, occupation or area (which means holding off bidding for the services of one productive factor by the owners of complementary productive factors). It is, I suggest, entirely a matter of the effectiveness of restrictive understandings as against the effectiveness of restrictive agreements.

Entrepreneurs usually realize that, in fixing product prices too high (which means selling too little) they are likely to induce their rivals to devote additional resources (possibly machinery sunk in concrete!) to the production of what they have overpriced. Similarly, in bidding for materials and labor, entrepreneurs usually know that if they offer too little (which means taking too little off the market) they will again run the risk of causing their rival’s operations to expand rather than their own. They normally perceive also that, in keeping their own product prices down, they are applying pressure on their competitors to do the same; and that, in offering more for materials and labor when prospects seem favorable, they are applying similar pressure on their competitors to follow suit. Such perceptions influence pricing conduct.

The terms “oligopoly” and “oligopsony” describe hypothetical situations in which entrepreneurs can reckon on their rivals not acting as rivals but in the opposite way. Each feels bound and able, without collusion, but through some sort of tacit understanding, to raise prices when any other entrepreneur (giving a lead) does so, or to refrain from cutting prices unless some other entrepreneur does, because each can rely upon all the others in the same field judging it to be profitable to follow his restraint. In particular, no entrepreneur will try to undercut another in selling the product, or try to outbid him in purchasing materials and labor, through reluctance to spoil a good buying or selling market. The assumption is that with no collusion, they will all act as though they were in formal collusion.

How important can such a situation be, especially in relation to the exploitation of labor in a society in which the strike threat is banned? Is it possible for an oligopsonistic set-up to bring about a “shut-in” of labor? The answer is, I think, that it is inconceivable. Tacit collusion must be ineffective collusion. There are two broad reasons.

Firstly, the circumstances of different firms, even those engaged in the production of the same kind of commodity, are normally so different from one another in respect of methods, detailed range of products, and in other ways, that it seems to be stretching the limits of common sense to suppose that in the real world they will refrain from any opportunity of cutting prices (a) when larger outputs promise economies of scale, or much larger sales, or (b) when reduced prices are thought profitable as a response to declining sales (to maintain normal or nearer normal outputs). And this is equally true in respect to the bidding up of costs under free market conditions.² Thus, an undertaking which so interprets prospective yields that it would judge it to be profitable to offer, say, a 5-percent increase in the wage rate so as to attract an additional 10 percent of employees, would not be put off by the fear that these employees might then be “poached” by its competitors, through the offer of still higher wage rates. If expectations of that kind did exist, they would surely include the expectation that, prospective yields being high, the undertaking which was first in the field would be in a position to expand to an extent which would make it unprofitable for its rivals to follow suit.

Secondly, competition for labor is not confined to those in a particular industry. The suppliers of assets in all industries and occupations are bidding for the complementary labor and materials needed. Can we, then, entertain the idea that entrepreneurs generally will refrain from making effective offers for marginal and relatively versatile workers from other firms, occupations or areas whom they forecast can be profitably employed by them? Would the knowledge that their bidding will contribute to a general rise in the free market (“natural scarcity”) value of labor (or, in an inflation, contributing to a rise in the money value of labor) be a sufficient deterrent?

The most typical expectations of an entrepreneur who decides to expand his sales by improving quality or reducing price, and to increase his productive capacity in order to do so, are that if he expands, it will be thought less profitable for others to expand. He may in part rely upon others thinking that his judgment of elasticity of demand or of rising demand, has been unjustifiably optimistic. But he may rely on similar projected growth on the part of others being postponed, curtailed or abandoned simply through his having gotten there first. Less often, I think, he may expect some of his rivals to share his explicitly demonstrated faith in general prospects and follow his example.³ Unless he supplies a small part of the market, however, he will in most cases expect market prices to fall because it will be to his rivals’ advantage to match his price adjustments (possibly in order to minimize any detriment to them due to his growth), while ceteris paribus costs of materials and labor will be somewhat higher. All these possibilities will induce caution in investment risk-taking. But there is no reason why they should induce oligopolistic restraint concerning prices or oligopsonistic restraint concerning bids for materials and labor, even if the number of legally independent firms is small.

All business decision-makers must, then, in every decision, take into account the possible reactions of their competitors, of their suppliers of materials, of labor, and of their customers; and it is easy for their calculated caution to be wrongly interpreted as oligopolistic or oligopsonistic in nature. But they are simply allowing for the fact that, if they do attempt to get a larger share of a given market,⁴ or a larger proportion of an expanding market, their competitors are unlikely to remain passive. When they cut prices and/or begin outbidding other entrepreneurs in the same field for materials and labor, perhaps investing in additional fixed assets, they expect reactions from their rivals. Any such initiative in the first place is likely, however, to have been due to the conclusion of one entrepreneur that his competitors have not as yet (as he himself has) perceived the extent to which the demand schedule for the product is elastic or rising. But he knows also that, if he discloses his judgment of the profitability of his own expansion so explicitly, he will almost certainly cause rival producers to reappraise prospects. Thus by continuously making allowances for his competitors’ forecast reactions, he is not cooperating oligopsonistic ally. And as far as his bidding for labor is concerned, it will usually be folly for him to hold off unless he can rely on a tight agreement that his rivals will do the same.

Among the risks that every investor in a competitive industry must take is that, partly because one entrepreneur does not know what decisions other entrepreneurs have made or are currently making, there may be overinvestment in specific assets. That is, every investor knows that either he or one of his competitors may prove to have provided more resources to produce a thing than will turn out to have been profitable in the long run,⁵ and that this will adversely affect his realized yields and those of one or more (perhaps all) other investors in that field. Such a situation creates, it is sometimes felt, a strong incentive for oligopsonistic restraint.⁶ The urge to oligopsonistic “reasonableness” is believed to be particularly powerful when the high-cost firms in the overinvested field remain in production. Theoretically, these less-efficient competitors may contribute the outputs which they originally planned to supply. That would mean, however, at a yield which would have induced them to invest very much less, or make no investment at all in that form, had it been forecast.

But an increased incentive to consider restraint in these circumstances does not mean an increased power to restrain profitably; and the entrepreneur who relies on the forbearance of others for his protection must know that he is taking a great risk. If there is indeed a possible increased group advantage to be gained from oligopsonistic restraint in the presence of underutilized capacity in the industry, there will be a concomitant risk of increased loss to any participant who should discover that his failure to compete for labor and materials has allowed one or more of his rivals to get ahead of him.

A quite different situation which superficially resembles that just discussed and has been treated as oligopolistic arises as a result of misconceived forms of antitrust control. Because high profitableness rather than scarcity contrivance has all too often tended to become the sin for which managements and the investors to whom they are responsible may be expected to be punished, especially when the high profits are gained through economies of scale, it seems often to have become expedient for low-cost firms to be careful not to allow their efficiency to affect high-cost rivals too adversely. There is profit in maintaining the solvency of some of their competitors because that reduces the risk of a misconceived antitrust case. The estimation of this risk enters prospective profit calculation in exactly the same manner that predictions of output and price decisions on the part of others enter that calculation. Certainly in these circumstances the output of the industry will be less than the social optimum; but that will have been due to an imposed cost factor (caused in turn by a misconceived form of antitrust policy) and not to oligopolistic exploitation.

The truth seems to be that effective tacit collusion cannot be imagined as having more than a negligible effect. Collusive exploitation requires quotas, with sanctions for their enforcement; or else sufficiently attractive prospects of a certain share of the market will have to be assured for every voluntary participant. But can we conceive of any substitute for the quota or the prospective market share inducement under simple tacit abstention from competition? Just think of what we must postulate. The low-cost firms (probably the most efficient) must judge it to be profitable to sacrifice prospects of a growing share of the market and spontaneously protect the high-cost firms (probably the less efficient). While this is conceivable when the risk of misconceived antitrust proceedings is the alternative, or under ironclad cartel contracts, it is hardly conceivable in their absence. In general, the advantage to the low-cost entrepreneurs of passing on to consumers the economies of their relative efficiency will outweigh all other considerations.

Experience seems to teach that the effectiveness of collusive restrict ion ism has required not only reliance on quotas, but the ability to discipline participants; and a system of policing has often been felt to be essential for successful exploitation. Those who collude may be few, but in the absence of any acceptable criteria for the “just” sharing of the spoils, the fear of various forms of nonprice competition working “unfairly” for some in the ring; the probability that some at least of the low-cost producers will feel that they can gain more through expansion than through the higher margins assessed; the eagerness of rival producers to get in first in times of real growth; or fear of losing sales in a declining market—all these and other factors seriously weaken the power to exploit, except through mergers and enforceable agreements.⁷ How then can the consequences on pricing of those who merely refrain from competition (price or otherwise) in the hope that their rivals will do the same be more than a niggling factor? In my judgment, most appearances of tacit collusion are illusory. Apparent inhibitions toward competition in the absence of definite restraint of trade are to be explained quite differently.

We can now turn from tacit restraint in general to oligopsony and consider the case of exploitation of labor. As we have seen, those who buy labor do so in the whole market for labor, except where very specialized skills are involved; while the ability even of a natural monopsony to exploit workers whose developed powers are unversatile depends upon the monopsonist’s ability to trick such workers into shutting themselves into a specialized undertaking. An oligopsony can hardly do that!

For instance, in the idle capacity case, where decline in demand for the product has been followed by a long-delayed failure to adjust product prices sufficiently, the situation is much more likely to be explained as a consequence of the maintenance of labor costs, especially when this occurs during recession. The idleness of many workers is then not due to managerial understandings that hold off bidding for idle labor (which, from the standpoint of an individual entrepreneur, could be employed profitably) but to wage rates tending to be more rigid downward than prices. If incentives for downward wage rate adjustments to protect the wages flow in depressed industries were as effective as incentives for downward price adjustment on the part of producers and merchants in most industrial materials, any appearance of oligopsony would probably vanish.

Again what may seem superficially to be lack of competition for labor, of oligopsonistic origin, among corporations in an industry may well be, ironically enough, evidence of the very perfection with which the free market is working (that is, in markets which are relatively unencumbered by strike-threat restraints or legally enacted restraints). When managements have created good relations with their staff, labor turnover is likely often to be very slow (under general economic stability). It may then look as though managements are not competing in the labor market. Yet even when the number of workers each firm is employing changes very slowly, there may be continuous competition, each firm retaining its valued employees by insuring that earnings and working conditions are at least as favorable in their service as any compensation likely to be offered elsewhere. Moreover, in these circumstances they will recruit juveniles by making offers, quietly communicated to parents and schools by letter or by advertisements, in a manner which entails bidding against rivals for a limited supply.

The fear of competition breaking out where an infectious optimism has created an unstable price or cost situation, or where format collusion exists is sometimes wrongly identified with fear of “predatory selling”—the attempt by one producer, or more than one acting in collusion, to ruin one or more competitors, drive their operations out of the industry, and so leave the aggressors a monopoly. But that is to confound pressures toward the survival of the least cost methods of using resources with a wholly different phenomenon. The former situation is brought about by a process which causes the withdrawal (through nonreplacement) or the writing off of resources which are being inefficiently utilized (which may mean the insolvency or winding-up of a firm). But “predatory selling,” as I define it, is the use of the pricing mechanism to render unprofitable the continued operation of one or more competitors. The essence of the situation is that, in the absence of such abuse of the pricing system, the firms eliminated would be quite capable of continuing to supply output, whether they were relatively efficient or relatively inefficient.⁸ The possibility of “predatory selling” can be a serious deterrent to investment in a field—a case of the private use of coercive power which can be classified with the strike threat.

When some competitors have been caused to fear that, if they act in their own self-interst by cutting prices and/or bidding up costs, predatory selling to drive them out will follow, we have one of the clearest examples of how antitrust law (wisely and disinterestedly administered) is the required remedy. The type of “predatory selling” which I judge to make up at least ninety percent of all such selling in practice takes the form of price-cutting in certain districts only or in respect of some special range of products; it is likely to be deliberately punitive in intention, in order to discourage others; it can be prevented by the enforcement of a simple rule—nondiscrimination in price⁹—a rule which will provide a kind of collective security; but it is not a phenomenon of oligopoly-oligopsony. Hence, in discussions of this topic, if it is said that fear of retaliation prevents price cutting or prevents the bidding up of material prices or wage rates, it may be either of the two conceptually distinct possibilities we have just noticed which may be envisaged. But I do not think that fear of “predatory buying” of labor¹⁰ has ever been an important factor limiting investment in any field. It has been used, however, to create “joint monopoly.”¹¹

The conclusion seems to me to be unchallengeable. Because the exploitation of labor requires a clear and rigorously enforced monopsonistic agreement among the purchasers of labor and cannot exist effectively in oligopsonistic form, even though managements may sometimes be reluctant to raise wage rates voluntarily at the first signs of labor scarcity, the needed protection for labor lies in the prevention of collusion. Laws which can most effectively prevent or restrain the formal contrivance of scarcity or plenitude (that is, which can weaken the private profitableness of the restrictive determination of outputs, prices and sales territories) as successfully as is achievable in the imperfectly governed world in which we live, can at the same time be equally successful in rendering impotent or trivial such oligopsonistic exploitation as might otherwise occur. Antitrust can, I think, prevent the private contrivance of scarcities or plenitudes (a) through collusion, or (b) through the scope for exploitation inherent in corporations which are large in relation to the scale of markets. It can effectively forbid pricing practices that use the value mechanism as a subtle means of private coercion for exploitative purposes. It can supplement the common law against fraud and misrepresentation by enforcing truthfulness in descriptions of the quality, content or weight of products (to protect the honest manufacturer or dealer from damage due to less-scrupulous competitors). And in so doing it can automatically cause such imperfections in the free market system as might be due to oligopolistic or oligopsonistic tendencies to be of niggling practical consequence.

I insist that it is no criticism of my argument that the content of antitrust law and its administration must necessarily have defects. All human institutions, however wisely thought out, are capable of constructive criticism. All too often they are immune from improvement only owing to the intellectual and moral shortcomings of opinion-makers.

I am not suggesting, it should be clear, that labor can be passive and ignore its own entrepreneurial function: firstly, in investing in skill acquisition and secondly, in discovering employment outlets. The latter is indeed the important function which the unions could undertake on behalf of their members in a strike-free system—playing on the divergencies of interest among producers and thereby breaking through any signs of oligopsonistic tendencies. But the survival of the right to strike would hinder, not assist, the performance of that function. For virtually alt man-made obstacles to labor mobility, and hence to the advantages of widely spread labor markets, have been erected through strike-threat pressures.

One final but unimportant point. I have not discussed the possibility of oligopolistic exploitation of investors by labor. An official wage commission in South Africa suggested in 1925 that the Africans in that country were in a “tacit combination” not to accept less than a certain wage rate. But as I pointed out in 1930, all that that really meant was that they all knew what the market rate was—that is, what they could get.¹² It illustrates my contention that the very perfection of some markets may leave an impression of oligopoly.¹³

NOTES

¹ That oligopolistic abuse tends (like monopolistic or monopsonistic abuse) to rest essentially upon what I have termed “shut-out” or “shut-in” power respectively is partially recognized in Franco Modigliani’s well-known article, “New Developments on the Oligopoly Front,” Journal of Political Economy (1958), p. 216. He says, “undoubtedly the impossibility of entry is frequently at least implicit in the treatment of oligopoly;” and “oligopoly could also be defined to exclude entry . . . the impossibility of Firms not now in the group, of producing the commodity—whether for physical or legal reasons.”

² Faced with a monopoly or oligopoly of labor (say, in the form of the maintenance of a union-enforced or a tacitly-enforced “standard rate,” when demand for the product has fallen off), entrepreneurial incentives would be to offer the fullest employment profitable at the contrived labor scarcity value expressed in the standard rate.

³ This is more likely to be the position, however, when the initiating entrepreneur’s decision to bring in additional resources is interpreted as his judgment, not that demand for the product is elastic, but that the demand schedule has risen or will rise.

⁴ “Given market” means that the demand schedule for the product is judged not to be changing.

⁵ “Profitable” means yielding more than the rate of interest on all increments of capital invested in the long run. The qualification, “in the long run,” is necessary to cover the case in which assets in the form of equipment are provided in the expectation that demand for their output will only gradually develop to justify the venture (see p. 152).

⁶ If overinvestment has occurred for this reason, the ideal reaction from society’s angle will be a cutting of the price of the end product, and perhaps an outbidding of competitors for materials and labor so that the least cost Firms come to supply a relatively large part of the cheapened output. The cheapness of the additional output provided in such circumstances is, so to speak, society’s partial compensation for the social detriment caused by the specific overinvestment—that is, society’s loss of additional output in other forms; for one overinvestment means another underinvestment.

⁷ The enforcement may be through private coercion, of course.

⁸ In an early article, I tried to draw attention to this important distinction. I used the term “aggressive selling” for what has subsequently become known, more appropriately, as “predatory selling.” See my “The Nature of Aggressive Selling,” Economica (1934).

⁹ Unless the parties discriminated against freely accept the discrimination because they are the beneficiaries therefrom. I have explained this point in the Economica article, “The Nature of Aggressive Selling,” referred to above and more specifically in “Discriminating Monopoly and the Consumer,” Economic Journal (1935). See also pp. 163-164.

¹⁰The cornering of labor supply in order to raise its price, thereby to ruin certain competitors, to monopolize the production and sale of a product, and then to raise its price and reduce the price of labor.

¹¹ See pp. 8, 50, 72, 98, 110-111, 128, 169.

¹² W. H. Hutt, The Theory of Collective Bargaining (Glencoe, Ill.: Free Press, 1954), p. 34.

¹³ Curiously enough the shoe was on the other foot in South Africa. A highly organized, collusive monopsony existed (and still exists) for the centralized purchase of African mine labor. I do not suggest that there has been monopsonistic abuse. See footnote 3, p. 114.