Oligopsonistic Cats and Dogs

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 oligopsonistic 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 discussed. Finally, the model is generalised to nest wage and employment competition and is extended to include other types of investment.