Search
Close this search box.

Table of Contents

Monopsony



Definition

A monopsony refers to a market condition where there is only one buyer or consumer, often being a single company or entity, controlling the demand for multiple sellers’ products or services. This enables the single buyer to dictate price terms as they essentially have control over the market. It’s the buyer-oriented version of a monopoly.

Phonetic

The phonetics of the keyword “Monopsony” is: məˈnäpsənē

Key Takeaways

“`

  1. A monopsony is a market condition where there is only one buyer who controls the entire market. This makes the buyer a price setter, meaning they have the power to determine the price of the goods or services.
  2. While monopsonies can lead to lower prices for the buyer, they can also result with lower wages for workers and decreased output from businesses, which may have negative effects on an economy.
  3. Monopsonies are different from monopolies where there is only one seller. However, both monopolies and monopsonies limit competition, which can lead to market inefficiencies and distortions.

“`

Importance

Monopsony is important in business/finance as it refers to a market condition where there is only one buyer or employer but multiple sellers or workers. This unique situation gives the single buyer or employer significant power to dictate pricing or wage levels due to the lack of competition. Essentially, under monopsony, the buyer can suppress prices or wages to increase their own profits because sellers or workers have no alternative outlets for their goods or labor. From an economic perspective, this can lead to inefficiency and inequity in the market. Furthermore, it is often considered in policy and regulation discussions as it impacts competition, wages, and overall economic health.

Explanation

Monopsony refers to a market condition where there is only one buyer or employer who therefore has significant power and influence over the prices or wages in that market. Here, the purpose of monopsony is to deliver significant purchasing power or wage control to the single buyer or employer. As a result, this entity can effectively dictate terms to its many suppliers or workers, leading to prices or wages that are typically lower than in more competitive conditions. Monopsonies often arise in situations where a single employer is the only source of jobs in an area, in certain public sector markets (such as defense), or in markets for specialized goods, services, or talent.Monopsonies are used, or more accurately, they occur naturally in certain conditions to give one entity in the market a considerable advantage. In theory, this can lead to lower prices for consumers, as the monopsonist can use its leverage to negotiate lower costs from suppliers. However, they can also lead to inefficiencies and inequities in the market, as a powerful monopsonist can use its position to squeeze suppliers or workers, forcing them to accept lower prices or wages. Consequently, while a monopsony can help the dominant buyer or employer, it can often disadvantage other players in the market.

Examples

1. National Health Service (NHS), UK: In the United Kingdom, the National Health Service is the primary employer of doctors and healthcare professionals. The government-run NHS is the only major buyer of these services within the country, making it a clear illustration of a monopsony. They dictate the terms, conditions and rates paid to these healthcare providers.2. De Beers Diamond Company: For much of the 20th century, De Beers controlled the production and sale of most of the world’s diamonds – buying up all the rough diamonds and then controlling supply through its distribution channels. While other buyers existed, De Beers was dominant enough to significantly influence the price and conditions in the diamond market. 3. Walmart: The retail giant, Walmart, is another example of a monopsony. With its immense buying power, Walmart can dictate terms to suppliers, often pushing down prices and conditions due to the fact that it often makes up a large ratio of the suppliers sales. This allows Walmart to offer lower prices to its customers.

Frequently Asked Questions(FAQ)

What is a monopsony?

A monopsony is a market condition where there is only one buyer (a monopsonist) who exercises control over the price of goods and services it purchases. This structure is the buyer’s counterpart to a monopoly, where there is only one seller.2.

Can you give an example of a monopsony?

One common example of a monopsony is a town where only one large factory employs most of the population. There are no other significant employers, so the factory can dictate wages and conditions.3.

How does a monopsony affect sellers?

Because there is only one buyer in a monopsony, that buyer can potentially exploit its power to drive down prices or manipulate terms and conditions in its favor.4.

Is a monopsony beneficial?

It can be beneficial for the monopsony (i.e. the single buyer) as it has a unique power to dictate market conditions and pricing. However, it is usually unfavorable for the sellers, as they have little to no power in determining the price for their goods or services.5.

How do monopsonies impact the labor market?

In a labor monopsony, the single employer has the power to suppress wages and limit employee benefits since workers have little to no alternative employment opportunities.6.

What’s the difference between a monopoly and monopsony?

While both are forms of market power, they represent opposite ends of the market. A monopoly refers to a market with only one seller, thereby controlling the supply of a good or service. A monopsony, on the other hand, refers to a market with only one buyer, thus controlling the demand.7.

Can government regulation address the issues caused by monopsonies?

Yes, government regulation such as price floors or antitrust legislation can help balance the power in a monopsony situation and ensure fair market prices and conditions. 8.

How does a monopsony affect the overall economy?

In general, a monopsony can potentially hinder economic competition and growth by stifling supplier or worker bargaining power and limiting opportunities for entrepreneurship. It can also lead to a suboptimal distribution of resources.

Related Finance Terms

Sources for More Information


About Our Editorial Process

At Due, we are dedicated to providing simple money and retirement advice that can make a big impact in your life. Our team closely follows market shifts and deeply understands how to build REAL wealth. All of our articles undergo thorough editing and review by financial experts, ensuring you get reliable and credible money advice.

We partner with leading publications, such as Nasdaq, The Globe and Mail, Entrepreneur, and more, to provide insights on retirement, current markets, and more.

We also host a financial glossary of over 7000 money/investing terms to help you learn more about how to take control of your finances.

View our editorial process

About Our Journalists

Our journalists are not just trusted, certified financial advisers. They are experienced and leading influencers in the financial realm, trusted by millions to provide advice about money. We handpick the best of the best, so you get advice from real experts. Our goal is to educate and inform, NOT to be a ‘stock-picker’ or ‘market-caller.’ 

Why listen to what we have to say?

While Due does not know how to predict the market in the short-term, our team of experts DOES know how you can make smart financial decisions to plan for retirement in the long-term.

View our expert review board

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More