A monopsony is a market structure in which there is only one buyer that sets prices, generates demand, and controls the market. In this market situation, a single buyer is a major purchaser of products or services from various sellers.
Why is monopsony a problem?
A company in a monopsony has a unique position and power to set its regulations since it controls a particular industry. This market structure can be presented in various forms and businesses. This model is often found in labor markets.
Let’s imagine that the only supplier of jobs in a certain area decides to set low wages. In this case, employees have to agree with this decision because of the company’s control over the workforce and no alternative employers. A monopsony brings no use for workers because its power enables firms to pay wages below the productivity of employees and underestimate them.
Such companies have bargaining power and can negotiate prices with suppliers. In this market structure, a buyer controls everything, it has a size advantage and no competitors. That’s why sellers have to agree with the purchaser’s conditions. The technology engineering market with only a few large companies demonstrates wage suppression. These firms often come to agreements regarding wages to reduce labor costs. As a result, such companies obtain high profits and workers low wages.
The monopsony buyer is similar to a monopoly seller because both of them are price makers and completely control the market. It’s considered inefficient because the resources are allocated unproductively in this market situation. The company pays a lower price for products and labor.
Now that you know some basic information about a monopsony, it’s time to proceed to the features of this market situation.
Characteristics of Monopsony
Since a monopsonist has buying power, sellers have to accept the rules this company creates. The market model can be characterized by three main points. Let’s review each of them.
- Single buyer. Firstly, it’s important to mention that in a monopsony there’s only one buyer, a price maker. This buyer controls the market and demand. For instance, if there is anyone who wants to sell products, the only option is to sell them to a single purchaser that exists in this market structure and comply with the company’s terms.
- No alternatives. This means that a monopsony in its pure form creates a situation in which sellers of products have no other alternative buyers. That’s why they have to sell their goods to one company that sets the prices which are usually quite low. Sellers agree with that because they want to sell their products and obtain at least the minimum profit.
- Barriers to entry. A monopsony implies one buyer because of the barriers this market structure creates for those companies that want to enter the market. This single company sets certain restrictions and makes it impossible for other buyers to enter. These barriers are similar to those in a monopoly and oligopoly: government license or franchise, resource ownership, patents, copyrights, and high start-up cost.
We’ve already reviewed the characteristics of a monopsony, so let’s walk you through the pros and cons.
Advantages and Disadvantages of Monopsony
A monopsony is an interesting market structure common in the labor market. It’s worth mentioning that the model is completely disadvantageous for workers since they have no alternatives and thus have to agree with this supplier of jobs, low wages, and certain regulations. There are benefits a single buyer (monopsonist) reaps and disadvantages this market structure brings to sellers. The pros for monopsonists are as follows:
- the power to achieve economies of scale;
- control over the price and demand;
- a big control over the market allows to depress the prices and obtain big profits;
- saved costs on wages of employees.
However, the sellers of products or services often obtain the cons of this market structure:
- no alternative buyers;
- lower profit after selling the products;
- lower wages in the labor market.
So now when you know the advantages and disadvantages, let’s make the difference between a monopsony and a monopoly clear.
Monopsony vs Monopoly
A monopsony is a specific situation within a market where a single buyer controls the demand and price and has the power over all sellers. You can observe monopsonies when some companies or individuals position themselves as the sole purchasers of certain products. Although this market structure doesn’t include competition among buyers, it can cause competition among sellers. They can compete for the price the monopsonist offers.
Monopsony allows a buyer to obtain benefits. For example, a single employer has power over a workforce. In this situation, employees act as suppliers that have to agree with the lower wages and regulations of a monopsonist. As a result, a purchaser can save costs on wages and obtain higher profits.
A monopoly is when there is only one supplier of certain products or goods that dominates the market. This company owns all of the supply of products, commodities, facilities, and amenities. The market structure eliminates economic competition for the manufacturing of certain goods, involving all possible substitute products. So the firm makes everything to hinder other players from entering the market.
Both market structures combine the characteristics of imperfect competition. They differ because the monopsony controls the demand for items whereas a monopoly controls the supply of the products.
So now when the difference between the two market systems is clear, it’s time to move to another section where you’ll see the examples of a monopsony in the modern world.
Examples of Monopsony
Nowadays you can encounter monopsony in different industries. Starting from supermarkets where food retailers buy products from farmers and milk producers at an extremely cheap price and then sell them under their own new higher price.
Let’s discuss government, for example. It is considered a monopsonist especially when it comes to the employment of civil servants, military, police, and naval officers. However, there are even more examples, so let’s review several companies.
- British Sugar. It is considered one of the most efficient sugar processors in the whole world. British Sugar is the sole producer of sugar from sugar beet in Britain. However, you probably didn't know that this leading producer of sugar buys almost all sugar beet crops produced in the United Kingdom.
- Amazon. This American technology company offers the biggest selection of electronics, books, computers, apparel, and software. Amazon is also known for purchasing in the retail book market and the power it has there. Its way of interaction with resellers shows that this company is a monopsony.
- Ernest and Julio Gallo. Today, this winery and distributor is the largest exporter of California wines. The company has a lot of buying power over grape growers. That is why grape wholesalers sell their grapes at lower prices and comply with the company’s terms and conditions.
So, different companies in various industries can operate as monopsonies. Now you are acquainted with one more market structure which is represented by Amazon, British Sugar, many supermarkets, and other companies.
- This article covers the definition of the term and provides a real-life example.
- In this article, a reader can find a definition of the term, advantages and disadvantages, and examples.
- This article provides examples in the real world.
Last Updated: 06.04.2021