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.

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