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.

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.

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.

Characteristics of a Monopsony

A monopsony is unique to other forms of market situation with distinctive market features. Some of these characteristics are below.

One Buyer

In a monopsony, there is only one buyer, which gives them significant market power and control over the price and quantity of goods or services purchased. If more than one buyer is present, it is not a monopsony. For this reason, there's usually natural or built-in limitations to the market that make it unfeasible or impossible for there to be other buyers.

Low Bargain Power for Sellers

Due to there being a single buyer that holds a majority of power, monopsonies mean sellers are relatively weak and have reduced bargaining power. This usually results in lower prices and lower quantities sold. Though there may be multiple suppliers or sellers, they usually have collective less ability to control the market compared to what the buyer can impose.

Market Inefficiencies

Market inefficiencies arise when the single consumer buys less of the good or service than would be produced in a more competitive market. This may force producers to cut wages, store unsold inventory that would have otherwise been consumed in a "normal" market, or reduce prices to unprofitable levels.

Limited Innovation

Since the buyer has significant control over the market, there is less incentive for suppliers to invest in innovation or quality improvements. Even if the producers were to innovate or find better ways to produce a good, they may not be rewarded by a competitive market through better margins or higher prices. Therefore, monopsonies are most detrimental to the long-term growth as it tends to stunt innovative thinking.

How Monopsonies Are Caused

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.

Physical Isolation

A monopsony can arise in a market that is geographically isolated or where transportation costs are high. This can limit the number of potential buyers and make it difficult for competitors to enter the market. This may also make it hard for market participants outside of the geographic region to ship goods into a physical area.

Limited Product Demand

When there is limited demand for a good or service, there may only be one buyer willing to purchase the product, resulting in a monopsony. Consider agriculture in developing countries. The good produced in these extremely rural areas often can't be shipped around the world. For this reason, this type of agriculture (and its associated shipping restrictions) is often only demanded by local governments or local food processing companies.

Barriers to Entry

High barriers to entry, such as regulations or high capital requirements, can make it difficult for new buyers to enter the market and compete with the existing buyer. This may be true in situations where a buyer must be credentialed, hold certain permits, or meet exclusive criteria.

Market Consolidation

A monopsony can result from market consolidation where several buyers merge and control a significant share of the market. Consider how the merger of telecommunication giants T-Mobile and Sprint caused changes on the demand side of business. Instead of there being two different buyers, the post-merger market resulted in just one company (but still potentially buying the same amount of goods).

Government Requirements

In some cases, government policies or regulations may lead to a monopsony in a particular market. For example, if the government is the only buyer of a particular product, it can create a monopsony. In addition, governments may enter into contracts that restrict who sellers can contract with or the quantities the producer may supply to broad markets.

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.

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.

Monopsony vs. Monopoly

A monopoly is a market situation where there is only one seller or producer of a particular good or service. This gives that seller considerable power to control prices and output. Meanwhile, a monopsony is a market situation where there is only one buyer of a particular good or service. Monopsony power arises when the buyer has the ability to lower the price of a product or service by reducing the quantity they purchase.

The difference between a monopsony and monopoly is the aspect of trade that is being controlled. While a monopoly has exclusive control over the supply of a good or service, a monopsony has exclusive control over the demand for that good or service. A monopoly leads to the producers have excess power, while a monopsony leads to a consumer having excess power.

Both a monopoly and monopsony can lead to market inefficiencies. However, each results in different inefficiencies that arise in different ways. For example, in a monopoly, consumers face higher prices. In a monopsony, workers may be forced to take on lower wages as a result in imposed lower prices.

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.

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.