Monopoly vs. Monopsony: An Overview

Both a monopoly and a monopsony signify conditions of imperfect competition, in which a single entity can influence what would otherwise be a free market operating under the laws of supply and demand. The difference between the two lies in the thing being singularly controlled—in one case, the supply of the goods or services, in the other, the demand for items or the market for them.

To put it another way, both terms refer to there being a single ("mono") dominant force in a marketplace that disrupts the usual buying-selling equilibrium. An individual seller controls a market monopoly, while a single buyer dominates a market monopsony.

Monopoly

A monopoly exists when a single entity is the sole provider of a particular asset or service. Monopolies can be considered an extreme result of free-market capitalism in that, absent any restriction or restraints, a single individual, company, or group becomes large enough to own all or nearly all of the supply of goods, commodities, facilities, amenities, or support systems.

Monopolies effectively eliminate economic competition for production of a particular good, including possible substitutes for it. Other firms are not able to enter the market. Monopolies also prevent external influences on the selling price for goods or services. In this way, they circumvent the natural economic laws of supply and demand. Buyers have no choice, and thus, no buying power.

A monopolistic company can set prices however it chooses and can change them at any time for any reason—resulting in high profits.

The existence of either a monopoly or a monopsony is sometimes attributed to a lack of government regulation in the form of antitrust laws.

Monopsony

A monopsony refers to a situation that involves control of the market through which specific goods or services are purchased. Monopsonies arise when individuals, corporate groups, or other entities are able to position themselves as the sole purchasers for a particular good or service. A monopsonistic company is thus able to use competition among suppliers or wholesalers to its advantage, driving down the selling or asking price for the given good or service.

Monopsony can also be common in labor markets when a single employer has an advantage over the workforce. When this happens, the suppliers—in this case, the potential employees—agree to a lower wage because of factors resulting from the buying company’s control. This wage control drives down the cost to the employer and increases profit margins.

Key Takeaways

  • Both a monopoly and a monopsony refer to a single entity influencing and distorting a free market.
  • In a monopoly, a single seller controls or dominates the supply of goods and services.
  • In a monopsony, a single buyer controls or dominates the demand for goods and services.
  • Both a monopoly and monopsony can result in high profits for the dominant entity but often are considered illegal because they inhibit competition.

Monopoly vs. Monopsony: Example

Walmart, known for its high-growth business model, has been called a monopsony of the discount retail market, acting as the primary buyer for low-cost goods. Walmart’s tendency to swallow or outpace its competitors has had a similar effect on the supplier markets as well, eliciting a series of antitrust cases against the company.

The so-called “Walmart effect” may keep employee productivity high and prices to consumers low, but it also has the potential to reduce wages and competition. Often, the arrival of a Walmart in a region drives out other retail businesses, so that Walmart becomes the only employer in town for unskilled or semi-skilled workers, which allows it to set wages and benefits on its own terms.

Of course, the loss of other retailers also means that Walmart effectively becomes the only place to shop, at least for staples and/or affordable goods. So the company monopolizes groceries, clothing, appliances, and whatever else is in its inventory to sell.

So, in a sense, Walmart acts as both a monopoly and a monopsony in an area: It has a lock on the local retail market, and it dominates the job opportunities for labor as the only major buyer of labor's talents.