Rev Ind Organ (2009) 35:257–274
Oligopsonistic Cats and Dogs
Gerda Dewit · Dermot Leahy
Published online: 19 August 2009
© Springer Science+Business Media, LLC. 2009
Abstract This paper examines strategic investment behaviour when ﬁrms have
oligopsony power in the input market. Focusing on the labour market, we study how
a ﬁrm’s labour supply augmenting investment affects the equilibrium when oligop-
sonistic ﬁrms set wages. Relative to a non-strategic benchmark, optimal investment
strategies involve boosting investment that leads rival employers to cut wages, but
involves cutting back on investment that causes the latter to increase their wages.
Implications of existing labour market policies for strategic investment are also dis-
cussed. Finally, the model is generalised to nest wage and employment competition
and is extended to include other types of investment.
Keywords Labour productivity augmenting investment · Labour supply augmenting
investment · Oligopsony · Strategic behaviour
This paper studies the investment behaviour of ﬁrms with buyer power. We examine an
oligopsonistic market setting, in which ﬁrms can make costly investments that affect
both their own input supply and that of their rivals.
While the existence of buyer power is not new—labour and agricultural product
markets are typical examples of markets with oligopsony power—it is currently getting
G. Dewit (
) · D. Leahy
Department of Economics, National University of Ireland, Maynooth, Maynooth, Ireland