MONOPSONY: CHARACTERISTICS, TYPES, ADVANTAGES, DISADVANTAGES - ECONOMY - 2025

The monopsony is a market condition in which there is only one buyer. A single buyer substantially controls the market as the largest buyer of goods and services offered by many potential sellers. As in a monopoly, a monopsony also has imperfect market conditions.

In microeconomic theory, it is assumed that in monopsony a single entity has market power over sellers, as the only buyer of a good or service. The alternate terms are oligopsony or monopsonic competition.

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The difference between a monopoly and a monopsony is mainly in the divergence between the controlling entities. A single buyer dominates a monopsonized market, while a single seller controls a monopolized market.

The power of monopsony exists when a buyer faces little competition from other buyers for that labor or product, so they can set wages and prices for the labor or goods they are buying at a lower level than it would be in a competitive market.

Theoretical example

The theory of monopsony was developed in 1933 by the economist Joan Robinson in his book "The Economics of Imperfect Competition."

A classic theoretical example is a mining town, where the company that owns the mine can set low wages, since it does not face competition from other employers to hire workers.

This is because they are the town's sole employer and isolation or geographic obstacles prevent workers from seeking employment elsewhere.

characteristics

- It is a marketing structure in which there is a single applicant or a single buyer.

- A monopsony has purchasing or negotiating power in its market.

- This purchasing power means that a monopsony can exploit its bargaining power with a supplier to negotiate lower prices.

- The reduced cost of purchasing inputs increases your profit margins, which increases the chances of making big profits.

- The only buyer faces a positive supply curve, so he can put his prices quite expensive depending on the merchandise he offers.

- You can buy as many products as you want at the current price, without being able to influence the price already established.

- Monopsony is one of the characteristics of imperfect competition. This imperfect competition exists in a competitive market where some of its sectors are not completely competitive.

Effect

The main effect of monopsony is that the single buyer in a given industry has control of the market. That buyer has too much power to set the price for the goods or services that only they are buying. This can be quite troublesome for the economy, so it should be avoided.

Since so many sellers compete to sell to that buyer, sellers have no choice but to lower their prices to remain competitive. That is why the buyer's control advantage has the effect of reducing the cost of the product.

Monopsony and monopoly

There is a fairly close relationship between monopoly and monopsony, because a monopoly company will easily become the sole buyer of many goods, especially items such as semi-finished products, raw materials, and other inputs.

Like a monopoly, a monopsony also does not adhere to standard prices, balancing factors on the supply side and the demand side.

In a monopoly, where there are few suppliers, the controlling entity can sell its product at a price of its choice, because buyers are willing to pay the designated price.

In a monopsony, the controlling body is a buyer. This buyer can use their size advantage to get low prices, because many sellers compete for the business.

Types

Monopsony in the labor market

Since workers sell their work, hiring by a single employer for an entire industry can effectively lower wages.

After all, workers who refuse to accept these lower wages have no other alternative to being hired. Only workers who voluntarily accept low wages end up being employed in that industry.

In monopsonies, an employer's advantage over the entire workforce turns wages into a kind of "race to the bottom." This is hugely problematic, because it worsens poverty and inequality.

This control of wages reduces the cost to the employer and increases its profit margins.

The engineering technology market offers an example of wage destruction. With only a few large technology companies in this market, major players such as Cisco, Oracle and others have been accused of colluding with wages to minimize their labor costs.

Thus, a few technology companies choose not to compete with each other regarding wages, benefits, and other working conditions.

Monopsony in the product market

In terms of the product market, monopsonists can exercise their purchasing power, such as:

- Set prices lower than in a competitive market with many competing buyers.

- Require suppliers to cover costs that the buyer would normally have to pay, such as packaging, labeling and advertising costs.

- Force providers to make global payments to the monopsonist. For example, to access particular positions in stores and points of sale, or to pay for product waste.

- Delay payments to providers to improve the monopsonist's cash flow.

In various industries there is a single buyer and several sellers. Supermarkets have monopsonic power in buying food from farmers.

Amazon.com is one of the largest book buyers. If publishers do not sell to Amazon at a discounted price, they will lose the largest book distributor.

Advantage

- Because the buyer is the only one, he can set his price in the market, so he can take over part of the bidder's offer.

- It can exert a great control on the market and can sink the prices of the products to acquire extraordinary gains.

- A monopsony can act as a useful counterweight to a monopolist's selling power.

- Prices, demands and needs will be dictated and regulated by the buyer.

- Producer surplus has a value, as does buyer surplus. Lower input costs will increase profitability, which could be used to finance capital investment and research.

- Best value for money. For example, the UK's national health service can use its bargaining power to lower the prices of routine drugs used in treatment. This means that cost savings allow for more treatments within budget.

- The growth of the “Fair Trade” label is proof of how consumer pressure can lead to better contracts and prices for farmers in developing countries.

Disadvantages

- Monopsony generates inefficiencies within the market, because the quantity and price of the purchase are below the equilibrium of a perfectly competitive market.

- The demand curve of a buyer has a negative slope, because as more units are consumed, the value given to them is lower.

- When a monopsonist wants to buy an additional unit, he must increase the price not only of that item, but also of those he already owns.

- It is a type of market that is classified as very anomalous and, at times, full of problems between sellers and buyers.

- Monopsony rates only occur in relatively small local markets or in circumstances where governments intervene.

- The monopsonists can buy everything they want at the current price, without being able to influence it.

- In monopsony, an unequal distribution of assets and income is observed.

- Abnormal earnings.

Examples

- Amazon.com is emerging as the Goliath of the retail sector. You currently get a better price than any other bookseller and most other product sellers.

- Car seat manufacturers in Japan have a small number of buyers as there are very few Japanese car assembly companies. They can control the quantities and prices of these seats as they are the only buyers in the country of this product.

- In the UK, the National Health Service accounts for more than 90% of purchases of all medicines, medical devices and other health-related products and services.

- The largest car rental company in a country that deals with a car supplier may exhibit monopsonistic behavior. They are probably the provider's biggest customer and in a position to enforce the terms.

Large supermarket chains

Because large supermarket chains are dominant buyers, they have an advantage over suppliers in the market and can lower the prices they pay to suppliers.

This is a very effective strategy to increase your profits. For example, when farmers are paid low prices for legumes, it is because they do not have the option of seeking other buyers for their products.

There are very few buyers of large quantities of pulses or other perishable products. Because these products must be sold relatively quickly, this further restricts farmers' options.

In an increasingly globalized world, supermarkets are free to source supplies from around the world, making it even more difficult for smaller suppliers to compete.

It is quite common to observe in all European countries that the large chains that sell basic food products extend their dependencies to clothing, electronic products, toys, books and medicines, among other items.

In China, many companies with thousands of workers work hard to keep product shelves stocked at large chains like Walmart.

References

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4. Gabriela Briceño (2019). Monopsony. Euston. Taken from: euston96.com.
5. Tejvan Pettinger (2017). Monopsony Exploitation. Economics Help Taken from: economicshelp.org.
6. Economics Online (2019). Monopsony power. Taken from: economicsonline.co.uk.