How does market power affect wages? Monopsony and collective action in an institutional context

To better understand the theoretical implications of new empirical findings which show that firms have monopsony power, we construct a monopsony-wage-model that integrates strategic interaction between workers and employers in the wage setting process into an institutional context. We show that workers’ collective action and efficient contract bargaining, in this context, reduces rents to firms and increases overall social efficiency. However, such outcomes are contingent on institutional support for workers, and in an environment that does not support workers, inefficient outcomes dominate.