Monopsony

What is 'Monopsony'

A monopsony, sometimes referred to as a buyer's monopoly, is a market condition similar to a monopoly except that a large buyer, not a seller, controls a large proportion of the market and drives prices down.

A monopsony occurs when a single firm has market power in employing its factors of production. It acts as a sole purchaser for multiple sellers, driving down the price of seller inputs through the amount of quantity that it demands.

BREAKING DOWN 'Monopsony'

In situations where monopsonies occur, sellers often engage in price wars to entice the single buyer's business, effectively driving down the price and increasing the quantity. Sellers that get caught in a monopsony are known to race to the bottom, losing any power they previously had over supply and demand.

For example, some economists have accused Ernest and Julio Gallo – a conglomerate of wineries and wine producers – of being a monopsony. The company is so large and has so much power in buying grapes from growers that sellers have no choice but to agree to its terms.

Examples of a Monopsony

Monopsonies take many different shapes and sizes, but most commonly occur when a single employer controls an entire labor market. When this happens, the sellers, in this case the potential employees, compete on wages for the few jobs available, driving down employee costs for the business.

The technology industry is a great example of this type of monopsony. With only a few large tech companies in the market for engineers, major players like Cisco and Oracle have been accused of colluding and choosing not to compete with each other on the wages they offer technical positions. This, in turn, suppresses wages so that the major tech companies realize lower operating costs and higher profits. This example also highlights the fact that a group of companies can act as a monopsony.

Another example of a monopsony involves the input suppliers of a large company. If, using a hypothetical situation, auto manufacturers consolidated into a single conglomerate, the resulting business entity would have a large amount of power over its suppliers. All the tire companies and rubber companies would compete with each other to win the auto manufacturers business. Producers of plastics, steel and other metals would also compete with each other to provide the best price to the large conglomerate. It's easy to see through this example that a monopsony, similar to a monopoly, can have adverse effects on an economy. However, consumers can benefit if the monopsony passes along its savings rather than keeping it as additional profit.

RELATED TERMS
  1. Buyer's Monopoly

    A buyer's monopoly, or "monopsony", is a market situation where ...
  2. Price-Taker

    1. An investor whose buying or selling transactions are assumed ...
  3. Price Maker

    A monopoly or a firm within monopolistic competition that has ...
  4. Monopoly

    A situation in which a single company or group owns all or nearly ...
  5. Natural Monopoly

    A type of monopoly that exists as a result of the high fixed ...
  6. Bilateral Monopoly

    A market that has only one supplier and one buyer. The one supplier ...
Related Articles
  1. Markets

    Understanding Imperfect Competition

    Imperfect competition appears in several different forms. Markets are evaluated by how they compare to, and try to approach, perfect competition.
  2. Markets

    How & Why Companies Become Monopolies

    Without competition, monopolies can raise prices and lower quality leaving consumers little choice. But monopolies can benefit consumers as well.
  3. Markets

    A History Of U.S. Monopolies

    These monoliths helped develop the economy and infrastructure at the expense of competition.
  4. Personal Finance

    The Ins And Outs Of Seller-Financed Real Estate Deals

    There's more than one way to buy or sell a house. Seller financing presents yet another unique option.
  5. Markets

    How a Monopoly Works

    In economics, a monopoly occurs when one company is the sole (or nearly sole) provider of a good or service within an industry. This potentially allows that company to become powerful enough ...
  6. Personal Finance

    Ins And Outs Of Seller-Financed Real Estate Deals

    Seller financing works like this: Instead of a buyer receiving a loan from a bank, the person selling the house lends the buyer the money for the purchase.
  7. Markets

    A History Of U.S. Monopolies

    Here are a few of the most notorious monopolies in U.S. history.
  8. Markets

    Early Monopolies: Conquest And Corruption

    This structure can be very effective, but it is also known for its abuse of power.
  9. Personal Finance

    The Pros and Cons of Owner Financing

    Details on the upside and risks of this type of deal for both the owner and the buyer.
  10. Managing Wealth

    5 Lessons Monopoly Teaches Us About Finance And Investing

    The game of Monopoly can increase your chances of having a better and useful understanding of prudent financial and investment principles.
RELATED FAQS
  1. What's the difference between monopoly and monopsony?

    Learn about the difference between a monopoly and a monopsony. Find out how these systems impact the suppliers and consumers ... Read Answer >>
  2. What is the difference between perfect and imperfect competition?

    Learn the differences between perfect competition and imperfect competition and what types of markets are considered imperfectly ... Read Answer >>
  3. How does a monopoly contribute to market failure?

    Read a simple overview of the theory of market monopoly, where it originated and some contemporary challenges to the classical ... Read Answer >>
  4. Are monopolies always bad?

    Learn why governments sanction some monopolies, such as monopolies over public utilities, and why these monopolies are good ... Read Answer >>
  5. What is a monopoly?

    Monopoly is a fun family game, but in real life, a monopoly can be dangerous to a country's economy. A monopoly occurs when ... Read Answer >>
  6. What are common examples of monopolistic markets?

    Discover what causes real instances of market monopoly, how it persists and where monopoly privilege is most common in the ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center