OLIGOPSONY: CHARACTERISTICS, EXAMPLES, ADVANTAGES, DISADVANTAGES - ECONOMY - 2025

The oligopsonio is a market in which there are only a few large buyers for a product or service, but many vendors. This allows buyers to exercise great control over sellers, which can effectively lower prices. This makes it a buyer's market.

The word oligopsony is derived from the Greek words 'oligos', which means little, and 'psonio', which means to buy. It contrasts with the oligopoly, in which there are few sellers and many buyers. In an oligopoly, suppliers are the ones who control the market and, ultimately, prices.

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Oligopsony is a market and a competition that is situated in what is commonly known as imperfect competition. Oligopolies, monopolies, and duopolies are also forms of imperfect competition. A monopoly is a market in which there is only one seller. A market with only two sellers is a duopoly.

Benefit for buyers

The oligopsony arises within a market in which there is a small number of demanders, in which all the power and control over the price of the different products and the quantity of a good in the market remains.

This means that the benefits are mainly for buyers, who have an intermediary role, and not for producers, who will be affected when their situation worsens, because they do not obtain a sensible price for the goods they manufacture.

characteristics

Small number of large buyers

In an oligopsony, the few buyers are usually large and powerful. As a result, buyers have considerable influence over sellers. In fact, if they cut prices in some cases, providers have no choice but to comply.

Each of the buyers is relatively large compared to the total size of the market. This generates substantial market control. The extent of market control depends on the number and size of buyers.

The different companies that make up the oligopsony are interdependent. In other words, the policies and decisions that are taken in one of the companies that are part of it, will have a series of direct repercussions on the rest of the companies.

Entry barriers

In an oligopsony, companies achieve and maintain market control through entry barriers. The most common include patents, resource ownership, government franchises, upfront costs, brand recognition, and decreasing average costs.

Each of these makes it extremely difficult, if not impossible, for potential competitors to enter the market.

Few alternatives

An oligopsony arises because sellers have few alternatives available to the goods they sell. Although alternate buyers may exist, they tend to be less desirable.

The price of the products is influenced because the number of buyers is very low. The type of products in this type of market is usually homogeneous.

The companies that buy make sure to obtain extraordinary profits, always taking care that these profits do not attract more competition in the market.

Oligopsony market

The oligopsony operates in the scenario of an imperfect competitive market. For this reason, it can be seen that it is the buyers who can exercise all the power over the circumstances presented by the market.

If companies in an oligopsony agree to pay only a certain price for a product or service and only buy a certain amount, then they will operate just like a monopsony.

When there is perfect competition in a market that the seller can sell to multiple buyers, the competition between the buyer results in an equilibrium price, which is acceptable to both the buyer and the seller.

In an oligopsony market, the seller can only sell to a small number of companies acting together, so he must accept the price at which the companies offer to buy, since there is no alternate buyer.

Examples

Fast food industry

In this industry, a small number of large buyers (McDonald's, Burger King, Wendy's, etc.) control the United States meat market.

Such control allows these mega fast food chains to impose the price they pay for meat on farmers, in addition to influencing animal welfare conditions and labor standards.

Cocoa

Three companies (Cargill, Archer Daniels Midland and Barry Callebaut) purchase the vast majority of the world's cocoa bean production, mainly from small farmers in third world countries.

Tobacco

American tobacco growers also face an oligopsony from cigarette manufacturers, with three companies (Altria, Brown & Williamson and Lorillard Tobacco Company) purchasing nearly 90% of all tobacco grown in the US and tobacco grown in other countries..

Publications

There are five publishing houses in US publications, known as the "Big Five," accounting for approximately two-thirds of all published books.

Each of these publishing giants also owns a number of specialized printers, serving different market segments. These are named after publishers that were previously independent.

Printers create the illusion that there are many publishing houses. The printers within each publisher coordinate to avoid competition with each other when they seek to acquire new books from the authors.

This oligopsony also discourages paying authors advances and creates pressure for authors to cater to the tastes of these publishing houses, thus reducing diversity.

Supermarkets

In developed economies around the world, supermarkets are becoming increasingly powerful. As such, they have increased their influence over suppliers - what food is grown and how it is processed and packaged.

The impact of this oligopsony reaches deep into the lives and livelihoods of agricultural workers around the world.

While increasing its market share with consumers, its influence has also driven many suppliers, who have been unable to compete, out of business. In some countries, this has led to reports of abuse, unethical and illegal behavior.

It has been proposed that there be greater regulation of the price that supermarkets pay to agricultural producers. A regulation would guarantee a minimum price to be paid to farmers and avoid unfair changes to contracts.

Supermarkets argue that this would lead to higher prices for consumers. However, farmers say it would help prevent oligopsony's abuse of power and decrease supermarkets' excess profits.

Advantage

Control of the buyers market

The biggest advantage in an oligopsony situation is that buyers have much more control. This is because there are very few, while there are many people looking to sell.

Because of this, buyers have a lot of power and control over the business transaction. They can use this factor to their advantage and dictate prices, quantity, and other conditions, knowing that the seller may be desperate to sell.

Being imperfect competition, buyers control the market through different entry barriers such as patents and brand recognition, which makes it very difficult for potential customers to enter the market.

There is no competition from buyers and their influence on the market is absolute. You don't need to hire a lot of staff.

Price determination

Buyers have the power to determine the prices of products. In oligopsony, it is possible to obtain the desired quantity of products at the current price, without having to exert any kind of influence on the price already set.

The higher the elasticity of supply for a given product, the less effect it can have on the price.

Disadvantages

Suppliers of goods do not have the ability to apply any conditions on their products.

The services or goods must be adapted to the demand of the buyers in terms of quantity and price. This is considerably problematic for sellers, as they may have to compromise their prices in order to sell their product. This puts the sellers at a considerable loss.

Interdependence

Each buyer of oligopsony has to closely monitor the activities of the other buyers in the industry. Decisions made by one buyer invariably affect others and are invariably affected by others.

Competition between interdependent oligopsony buyers is comparable to athletic competition. The success of a team depends not only on its own actions, but also on the actions of its competitor. Oligopsony buyers are in competition among few.

Rigid prices

Many industries tend to keep the prices they pay relatively constant, preferring to compete in a way that does not involve changing the price.

The main reason for sticky prices is that competitors are likely to match price increases, but not price reductions. Therefore, a buyer has little to gain by changing prices.

Mergers

Buyers perpetually balance competition with cooperation. They often seek cooperation through mergers, legally combining two separate buyers into a single buyer.

Since oligopsony has a small number of buyers, the incentive to merge is quite high. Doing so gives the resulting buyer even greater control of the market.

Complicity

Another common method of cooperation is when two or more buyers secretly agree to control prices, purchases, or other aspects of the market.

When done right, complicity means that buyers behave like a single buyer, a monopsony. As such, they can set a monopsony price, buy a monopsony amount, and allocate resources as inefficiently as a monopsony.

References

1. Will Kenton (2018). Oligopsony. Investopedia. Taken from: investopedia.com.
2. Gabriela Briceño (2019). Oligopsony. Euston. Taken from: euston96.com.
3. Jason Donev (2017). Oligopsony. Energy Education. Taken from: energyeducation.ca.
4. Tejvan Pettinger (2011). Oligopsony Definition. Economics Help. Taken from: economicshelp.org.
5. Amos Web (2019). Oligopsony. Taken from: amosweb.com.
6. Revolvy (2019). Oligopsony. Taken from: revolvy.com.