What is a 'Monopsony'?

A monopsony, sometimes referred to as a buyer's monopoly, is a market condition similar to a monopoly. However, in a monopsony, 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 through its factors of production. The firm is the sole purchaser for multiple sellers and drives down the price of the seller's products or services according to 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 can find themselves in a race to the bottom and 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 buying power over grape growers that sellers have no choice but to agree to the company's terms.

Examples of a Monopsony

Monopsonies take many different forms, but they most commonly occur when a single employer controls an entire labor market. When this happens, the sellers, in this case the potential employees, compete for the few jobs available by accepting lower wages, which drives down employee costs for the business.

The technology industry is an example of this type of monopsony. With only a few large tech companies in the market requiring engineers, major players such as Cisco and Oracle have been accused of collusion and choosing not to compete with each other in terms of the wages they offer for technical positions. This suppresses wages so that the major tech companies realize lower operating costs and higher profits. This example illustrates how a group of companies can act as a monopsony.

Another example of a monopsony could be the suppliers to a large company. If auto manufacturers consolidated into a single conglomerate, the resulting business entity would have substantial power over its suppliers. All the tire and rubber companies would compete with each other to win the auto manufacturer's business. Producers of plastics, steel and other metals would also compete to provide the best prices to the large conglomerate. This example shows 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 by lowering the prices of its products rather than enjoying additional profits.

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