Oligopsony

Oligopsony: An Overview

An oligopsony is a market for a product or service which is dominated by a few large buyers. The concentration of demand in just a few parties gives each substantial power over the sellers and can effectively keep prices down.

The opposite effect can be seen in an oligopoly. It is a market that is dominated by a few sellers, who can keep prices high in the absence of competition from alternative sources of supply.

Understanding the Oligopsony

The fast-food industry is a good example of an oligopsony. A small number of large buyers including McDonald's, Burger King, and Wendy's buys a huge amount of the meat produced by American ranchers. That gives the industry the ability to dictate the price they are willing to pay.

Cocoa is a less obvious example of an oligopsony. Just three firms, including Cargill, Archer Daniels Midland, and Barry Callebaut, buy most of the world's cocoa bean production, which mostly originates with small farmers in third-world countries.

American tobacco growers supply an oligopsony of cigarette makers. Three companies, including Altria, Brown & Williamson, and Lorillard Tobacco Company, buy nearly 90% of all US-grown tobacco and supplement it with tobacco produced in other countries.

The Publishing Oligopsony

In American book publishing, consolidation has led to the emergence of just five dominant publishers. Known as the Big Five, they account for about two-thirds of all books published. 

This is not immediately evident to readers. Each of the publishing giants has absorbed or created a number of specialized imprints that cater to different market segments and often carry the names of formerly independent publishers.

Imprints create the illusion that there are many publishers. But they coordinate within the parent company to prevent internal competition for manuscripts from popular authors. 

The publishing oligopsony also tends to depress advances paid to authors and creates pressure for authors to cater to the tastes of the publishers.

In recent years, supermarkets have begun to emerge as an oligopsony. The largest parent company in the industry is now Kroger's, which operates chains including Dillons, Pay-Less Super Markets, Ralphs, and City Market, among many others. The German company Aldi Nord owns not only Aldi's but Trader Joe's.

This emerging oligopsony is reaching developed economies around the world. As a result, they increasingly influence not only price but what crops are grown and how they are processed and packaged.

The impact of this oligopsony reaches deep into the lives and livelihoods of agricultural workers around the world. Their influence has also forced many suppliers who couldn't compete out of business. In some countries, this has led to allegations of unethical and illegal conduct.

Oligopoly vs. Oligopsony

In an oligopoly, the control is in the hands of a few sellers. As long as they stay firm on prices, the buyers have little negotiating room.

An oligopsony market sees frequent price wars as each player works to entice a buyer's business. That effectively drives the price a down and the quantity up.

Getting caught in an oligopsony is known as "racing to the bottom." Sellers lose the power to control supply and demand.