Monopsony

Published Oct 25, 2023

Definition of Monopsony

Monopsony is a market structure in which there is a single buyer for a good or service. In other words, there is only one dominant buyer and many sellers. This gives the buyer significant market power, as it can dictate the terms of trade and exert control over prices paid to suppliers. Monopsony is the opposite of monopoly, which is a market structure in which there is only one seller and many buyers.

Example

A real-life example of monopsony can be found in certain labor markets. For instance, imagine a small town with only one major employer, such as a factory. The factory is the only buyer of labor in the area, as it provides the majority of employment opportunities. As a result, workers have limited options and are forced to accept the wages and working conditions set by the factory. The factory, on the other hand, can exploit its monopsony power to pay lower wages and offer fewer benefits than it would in a more competitive labor market.

Another example of monopsony can be seen in agricultural markets, where large supermarket chains may have significant buying power over farmers. These chains can leverage their market dominance to negotiate lower prices for the produce, putting pressure on farmers who have limited alternative buyers.

Why Monopsony Matters

Monopsony has important implications for market dynamics and economic welfare. When a single buyer has significant market power, it can lead to reduced competition and inefficiencies. Suppliers may face unfair bargaining power, leading to lower prices and reduced income. Additionally, monopsony can hinder innovation and technological progress, as suppliers have less incentive to invest in research and development when faced with limited market opportunities.

Understanding the concept of monopsony is important for policymakers and regulators. They can use this knowledge to identify and address instances of monopsonistic power, such as implementing anti-trust measures or promoting competition in markets dominated by a single buyer. By promoting fair competition and protecting suppliers from exploitation, policymakers can help create more efficient and equitable markets that benefit both buyers and sellers.