Monopsony: Definition, Causes, Objections, and Example

What Is a Monopsony?

A monopsony is a market condition in which there is only one buyer, the monopsonist. Like a monopoly, a monopsony also has imperfect market conditions. The difference between a monopoly and a monopsony is primarily in the difference between the controlling entities. A single buyer dominates a monopsonized market while an individual seller controls a monopolized market. Monopsonists are common in areas where they supply most or all of the region's jobs.

Key Takeaways

  • A monopsony refers to a market dominated by a single buyer.
  • In a monopsony, a single buyer generally has a controlling advantage that drives its consumption price levels down.
  • Monopsonies commonly experience low prices from wholesalers and an advantage in paid wages.

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Understanding a Monopsony

In a monopsony, a large buyer controls the market. Because of their unique position, monopsonies have a wealth of power. For example, being the primary or only supplier of jobs in an area, the monopsony has the power to set wages. In addition, they have bargaining power as they are able to negotiate prices and terms with their suppliers.

There are several scenarios where a monopsony can occur. Like a monopoly, a monopsony also does not adhere to standard pricing from balancing supply-side and demand-side factors. In a monopoly, where there are few suppliers, the controlling entity can sell its product at a price of its choosing because buyers are willing to pay its designated price. In a monopsony, the controlling body is the buyer. This buyer may use its size advantage to obtain low prices because many sellers vie for its business.

Monopsony comes from two Greek words: "monos" meaning "single" and "opsonia" meaning "purchase."

Monopsonies take many different forms and may occur in all types of markets. 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 buying power over grape growers that grape wholesalers have no choice but to lower prices and agree to the company's terms.

Monopsony in the U.S. Labor Market

Monopsony can also be common in labor markets when a single employer has an advantage over the workforce. When this happens, the wholesalers, 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.

The technology engineering market offers one example of wage suppression. With only a few large tech companies in the market requiring engineers, major players have been accused of conspiring on wages to minimize labor costs so that the major tech companies can generate higher profits. This example illustrates a sort of oligopsony in which multiple companies are involved.

Criticisms of Monopsonies

Economists and policymakers have increasingly become concerned with the domination of just a handful of highly successful companies controlling an outsized market share in a given industry.

They fear these industry giants will influence pricing power and exert their ability to suppress industry-wide wages. Indeed, according to the Economic Policy Institute, a nonpartisan and nonprofit think tank, the gap between productivity and wage growth has been increasing over the last 50 years with productivity outpacing wages by more than six times.

Monopsony vs. Monopoly

Monopsony and monopoly are two sides of the same coin. While monopsony refers to one buyer in a market of multiple sellers, monopoly refers to one seller in a market of multiple buyers. Monopsony is about demand while monopoly is about supply.

In 2018, economists Alan Krueger and Eric Posner authored A Proposal for Protecting Low‑Income Workers from Monopsony and Collusion for The Hamilton Project, which argued that labor market collusion or monopsonization might contribute to wage stagnation, rising inequality, and declining productivity in the American economy.

They proposed a series of reforms to protect workers and strengthen the labor market. Those reforms include forcing the federal government to provide enhanced scrutiny of mergers for adverse labor market effects, banning non-compete covenants that bind low-wage workers, and prohibiting no-poaching arrangements among establishments that belong to a single franchise company.

Example of a Monopsony

Take the example of a coal factory in a coal mining town, an oft-cited example of a monopsony. A coal factory sets up shop in an area where there is no civil life or residents. The company attracts workers and a town builds up around the factory where the majority of the employees work.

The factory is the only real employer in town, it can set wages below market prices, and determine how many individuals will be employed at any time. This has a ripple effect on the rest of the community, such as the other types of businesses set up in town, the amount they can charge, and how many people they can hire.

If the coal factory went bust and closed, there would be no jobs, and therefore, no demand for any of the other goods and services sold by the businesses in the town. But because the coal factory is the only real employer, its wages can be unfair and its working conditions poor and unsafe, yet people will still seek to work there.

What Are the 3 Characteristics of a Monopsony?

The three primary characteristics of a monopsony are (1) one firm purchasing all of the goods and services in a market, (2) no other buyers in the market, and (3) barriers to entry into the market.

What Is the Advantage of a Monopsony?

The primary advantage of a monopsony goes towards the single buyer in the market, allowing for a controlling advantage that decreases the price levels of the good or service being bought. This reduction in price allows for a reduction in costs that can be passed on elsewhere.

Is Amazon a Monopsony?

Some experts do consider Amazon to be a monopsony as it has become the largest, and sometimes, only buyer in its market of specific goods and services that it then sells on its platform. Because it is the only buyer, primarily because it controls the largest platform to sell certain goods, it can dictate the prices in which it pays for those goods and services it then sells.

The Bottom Line

A monopsony is a market condition in which there is only one buyer. Because there is only one buyer for a good or service, the buyer sets the demand, and therefore, controls the price. Monopsonies, like monopolies, are inefficient to a free market, where supply and demand regulate prices to be fair for consumers.

Article Sources
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  1. Payroll Heaven. "Monopsony."

  2. Brookings. The Hamilton Project. "A Proposal for Protecting Low-Income Workers from Monopsony and Collusion."