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 and is often found in labor markets.
Let’s imagine that the only supplier of jobs in a particular area decides to set low wages. In this case, employees have to agree with this decision because of this company’s control over the workforce and the absence of alternative employers. Monopsonies bring no use for workers because their power enables firms to pay wages below employees’ productivity and underestimate them.
Such companies have bargaining power and can negotiate prices with their suppliers. In this market structure, a buyer controls everything, they have 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 are left with low wages.
A buyer in a monopsony 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. Moreover, a monopsonist company pays a lower price for products and labor.
Now that you know some basic information about 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. Three main points can characterize the market model. 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 anyone wants to sell products, the only option is to sell them to a single purchaser that exists in this market structure and comply with their 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, usually quite low. Sellers agree with that because they want to sell their products and obtain at least the minimum profit.
- Barriers to entry. Monopsonies involve only one buyer because of the barriers this market structure creates for companies that want to enter the market. A 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, including 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 its pros and cons.
Advantages and disadvantages of monopsony
It’s worth mentioning that the model is entirely disadvantageous for workers since they have no alternatives and have to agree with a supplier of jobs, low wages, and certain regulations. There are benefits a single buyer (a 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;
- control over the market allows to depress the prices and obtain big profits;
- costs saved 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.
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 a monopsonist offers.
Monopsony allows a buyer to obtain benefits. For example, a single employer has power over the workforce. In this situation, employees act as suppliers who have to agree with a monopsonist’s lower wages and regulations. 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. Therefore, a firm makes everything to hinder other players from entering the market.
Both market structures combine the characteristics of imperfect competition. They differ because a monopsony controls the demand for items, whereas a monopoly controls the supply of the products.
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. One of the brightest examples is supermarkets that buy products from farmers and milk producers at an extremely low price and then sell them at their higher new 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. British Sugar is the sole producer of sugar from sugar beet in Britain. It is considered one of the most efficient sugar processors in the whole world. However, you probably didn’t know that this leading sugar producer 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 for the power it has there. Its way of interaction with resellers shows that this company is a monopsonist.
- Ernest and Julio Gallo. Today, this winery and wine 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.
Hence, different companies in various industries can operate as monopsonies. Now you are acquainted with one more market structure 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: 15.10.2021