This firm goes from a monopoly position both in employing labor and selling output to having competition in both arenas. Start the analysis using the standard model of monopsony, where the firm’s marginal revenue product is defined as marginal physical product x marginal revenue. Competition from the new firm is going to be reflected in two ways:

• First, as a leftward shift in the labor supply curve, because employees now have the option of another employer, and
• Second, as a leftward shift in the product demand curve, because customers now have another supplier. This translates into a leftward shift in the marginal revenue product (since a decrease in product demand, decreases MR).
• The effect of the first effect is to reduce employment (as some workers choose to work for the competition), and to increase wages (necessary to retain the remaining workers.
• The effect of the second effect is to reduce employment even more, and to reduce wages (since labor is worth less to the firm).
• Employment clearly falls. The effect on wages is indeterminate depending on whether the decreased demand or decreased supply dominates.

There are several elements to this problem. First, students need to demonstrate understanding of the initial equilibrium under monopsony, especially how to find the equilibrium wage and employment. Second, students need to demonstrate how the competition in the labor market will shift their labor supply curve, and its effect on wages and employment. Third, students need to demonstrate how the competition in the product market will shift their labor demand curve, and its effect on wages and employment. Finally, students need to combine the two to obtain the overall effect, noting especially that the effect on wages is unclear. They may get to this stage without noting the latter, simply drawing a conclusion for wages based on how they drew the graph.