WHAT IS Buyer's Monopoly
A buyer's monopoly, or monopsony, is a market situation where there is only one buyer of a good, service or factor of production. A buyer's monopoly is, as the term suggests, the buyer’s counterpart of a monopoly, where there is a single seller. This situation gives the buyer considerable power to demand concessions from sellers, since the sellers have no alternative to selling to the buyer.
BREAKING DOWN Buyer's Monopoly
A buyer's monopoly can exist across markets. A buyer has monopsony power if there is an upward-sloping supply curve. Generally, a buyer's monopoly is undesirable. Inefficiencies caused by lack of competition lead to a dead weight loss in the economy as a whole. A buyer's monopoly is able to use its market power to capture additional profits for its owners.
Cases of pure buyer's monopolies are rare, but there are numerous scenarios in which a buyer can have a degree of monopsony 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, wield monopoly power. These factor markets include labor markets as well as non-labor markets. Whatever the source of monopsony power, buyers are likely to pay a lower price and to buy a smaller quantity than those who operate in a more competitive environment.
In the case of the labor market, a single large employer, such as Wal-Mart 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 monopsony 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 monopsony power in employing them. A single-payer health-care 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 health-care 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 dead weight loss would occur if the quality or availability of health care declined due to the enactment of such a system.
Comparing Buyer's Monopoly with Monopoly
There is a close relationship 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 price of products based on the demand curve; the monopsony sets prices of factors based on the factor supply curve.