What Is a Buyer's Monopoly?
- A buyer's monopoly is when there is only one buyer in a market for a good and sellers have no alternative. It is also known as a monopsony.
- A buyer's monopoly offers a significant competitive advantage to the buyer to capture above normal profits and a larger share of the total gains from trade.
- The buyer's monopoly gains come at the expense of the sellers and in some cases can result in a deadweight loss to society.
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Understanding a Buyer's Monopoly
A buyer's monopoly is, as the term suggests, the buyer’s counterpart of a monopoly, where there is a single seller. The resultant power to demand concessions from sellers gives the buyer a considerable competitive advantage.
A buyer's monopoly can exist across markets. A buyer has monopsony power if there is an upward-sloping supply curve and only one buyer. A buyer's monopoly is able to use its market power to capture additional profits for its owners. Achieving and maintaining a monopsony offers an opportunity for a powerful competitive advantage to the buyer.
Cases of pure buyer's monopolies are rare, but there are numerous scenarios in which a buyer can have a degree of market power. Generally, buyers are more likely to have monopsony power in factor markets and less likely in product markets, where the seller is more likely to have power and, in some cases, monopoly power. These factor markets include labor markets, as well as markets for capital goods and raw materials.
From the point of view of the sellers, and possibly across all social welfare, a buyer's monopoly can undesirable. Inefficiencies caused by a lack of competition may lead to a deadweight loss in the economy as a whole if the monopoly buyer is unable to discriminate in the amount paid for different units of the good being purchased. When this is the case, the monopoly buyer’s marginal cost curve will be higher than the sellers' supply curve, and the buyer will pay a lower price to buy a smaller quantity than those who operate in a more competitive environment.
The deadweight loss then occurs due to unsold products and unemployed resources that go to waste. This kind of situation can potentially occur with raw materials or labor, such as for agricultural commodities or low-skilled labor, but only where the buyer is somehow required to pay a uniform price per unit.
When the buyer is able to pay a different rate for additional units of the good or factor, then the buyer can purchase a similar quantity as under competitive conditions and simply capture a larger share or the entirety of the gains from trade. In this situation, the buyer’s marginal cost curve will be identical to the sellers’ supply curve. This leaves no deadweight loss to society, but still leaves the sellers worse off than under competitive conditions, because the buyer is able to extract some or all of their producer surplus. This situation is more likely to be the case in markets for specialized, skilled labor.
Employee compensation often varies from employee to employee, and employers are easily able to pay newly hired employees more than existing employees. Since, by definition in a monopoly buyer situation, the existing employees have no other option but to sell their labor to the monopoly buyer, they will have little or no power to demand higher wages to match the new hires.
In the case of the labor market, a single large employer, such as Walmart or a mining company, can be a buyer's monopoly in small or isolated towns. Even if one employer does not completely dominate the market, it may have market power over certain types of labor. For example, a hospital may be the only large employer of doctors in a local market, and therefore have market power in employing them.
A single-payer healthcare system would also qualify as a buyer's monopoly. Under such a system, the government would be the only buyer of health services. This would give the government considerable power over healthcare providers. It is sometimes argued that such a system would be advantageous to citizens because a government-controlled buyer's monopoly could gain sufficient market power to drive down the prices charged for healthcare services. Critics claim that a deadweight loss would occur if the quality or availability of healthcare declined due to the enactment of such a system.
Buyer's Monopoly vs. Monopoly
There is a close analogy between the models of monopoly and a buyer's monopoly, or monopsony. Both are price makers: The monopoly is a price maker in its product market, that is, the market for finished products and services. The buyer's monopoly is a price maker in its factor market, that is, the market for services of production, including labor, capital, land, and raw materials used to make finished products. Changes in price are inextricably tied to quantity in either case. Both firms set prices at which they can sell or purchase the profit-maximizing quantity.
The monopoly sets the quantity based on the marginal revenue curve and the price of products based on the demand curve, while the monopsony sets the quantity based on the marginal cost curve and prices of factors based on the factor supply curve.