When A Large Buyer Controls A Huge Proportion Of A Market GMAT Reading Comprehension

Reading Passage Question

When a large buyer controls a huge proportion of a market and therefore, can push down the prices, the buyer is said to be exerting ‘monopsony’ power. In the labour market, such a situation can occur when an employer employs a specific type of labour on a large scale. For example, when a certain manufacturer is a large employer for labour with a specific skill set in an economy, the employer has the bargaining power to hold down the wages of these workers much below the competitive level of compensation in an otherwise healthy economy. The workers who decide to join the job are forced to accept such low wages and also the accompanying substandard working conditions in most cases, simply because they hardly have any alternative job opportunities. Clearly, monopsony leads to wage stagnation, unfilled job positions, and consequently slowed economic growth, and the current wage situation in the US reflects the impact of monopsony in various industries.

Employers who exert such influence not only push down the wage levels but also limit the alternate opportunities for their employees through restrictions such as non-compete clauses or non-poaching agreements, restrictions that severely limit the employees’ ability to switch to another employer even across different geographical locations and that discourage potential employers from poaching the employees. Because of such restrictions, industries that are controlled by a handful of giant companies, further reduce the workers’ employment opportunities and therefore, their earning potential.

The Obama administration had awakened to the problem of monopsony when hi-tech companies like Google and Apple came into the limelight when they agreed not to poach on one another’s talents and not to unfairly push down their workers’ wages. The administration should consider certain moves that can address the situation. Firstly, the federal government should prohibit companies from giving lower than global average wages to their workers. Secondly, the Justice Department should make it loud and clear that non-compete or non-poaching agreements are illegal. Thirdly, mergers and consolidations that unfairly reduce competition for labour in the respective market and hold down wages should be restricted.

“When a large buyer controls a huge proportion of a market”- is a GMAT reading comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension.

This GMAT Reading Comprehension consists of 3 comprehension questions. The GMAT Reading Comprehension questions are designed for the purpose of testing candidates’ abilities in understanding, analyzing, and applying information or concepts. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Solution and Explanation

1. According to the passage, which of the following is responsible for wage stagnation?

1. Globalisation
2. Automation
3. Monopsony
4. Presence of labour-intensive industries
5. Steady private-sector economic growth.

2. All of the following are likely to be an outcome of monopsony except

1. Employers not hiring individuals presently employed at certain companies with whom they have non compete agreements.
2. In spite of steady economic growth, wage levels of most workers remain the same over a long period of time.
3. Workers unable to switch jobs despite having necessary skills and there being vacancies that require those skills.
4. Workers forced to agree to and continue with low wages and unconducive work conditions.
5. Companies rejecting job candidates because the candidates do not have requisite work experience.

3. All the following can be inferred from the passage except

1. The government is aware of the use of monopsony power in the labour market.
2. Non-compete clauses facilitate a worker’s decision to switch jobs as per his requirement.
3. Mergers often facilitate the use of monopsony and thereby hinder wage growth.
4. Big companies can use non-poaching agreements, leading to wage suppression.
5. A large buyer controlling a big portion of the market can push down the prices.

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