Definition: Monopsony refers to an imperfect as well as rare market structure wherein there is just one buyer in the market and an infinitely large number of sellers. Further, the buyer in such a market is called a monopsonist. The buyer controls and dominates the entire market.
Monopsonist gets their power from being the only consumer of the product or service. They use this power to negotiate and lower the prices. This implies that the buyer possesses monopsony power which means that the buyer can buy the product or service at a price less than the price prevailing in the competitive market. Monopsonist sets the price by looking at the supply curve.
This is a result of geographical constraints, regulation by the government and consumer demands. The monopsonist enjoys market power, as he is the major purchaser of goods and services. Hence, it has a positively sloped but flatter supply curve.
Hence, the buyer faces no to negligible competition with the other buyers for goods or services. So, the buyer can set the price or wages for it and generate demand.
It is the opposite of a monopoly market structure, wherein the seller has full control over the market. In other words, we could also say that it is a complementary form or mirror image of monopoly.
- In the United Kingdom, Network Rail controls and influences the market for buying rail track maintenance.
- In India, The Government of India will be called a monopsonist, in the fighter plane market. This is because it is the sole purchaser of fighter planes in India.
Do you know?
The theory of Monopsony was coined by Joan Robinson, in the book – ‘The Economics of Imperfect Competition‘ in the year 1933.
Salient Features of Monopsony
- Single Buyer: As there is a single buyer, in this market condition, the buyer control both the market as well as demand for the product.
- No alternatives: In this situation, the seller has no other alternative buyers. It is assumed that the sellers should not be able to sell their products to any other firm outside the market. Therefore, the sellers are compelled to sell their goods to that particular company. The buyer fixes the price at which, it will buy the goods. Sellers often accept the proposal of the buyer, because they don’t want to miss out on the minimum profit.
- Large number of sellers: There are a large number of sellers against a single buyer. Each seller strives to sell their product or service to the buyer. So, the buyer can influence the price.
- Barriers to entry: There is only one company that buys the produce of the seller firms, so there are barriers to entering this market for the buyers. The buyer company restricts the other firms by setting certain rules which make it impossible for the other buyers to enter the market.
Is monopsony a problem?
Think of a situation where there is only one buyer of a product in the industry. Further, there are many firms attempting to sell the product to that particular buyer. In this way, the buyer is in the dominating position because the selling firms are producing goods only for that buyer. Also, there is an advantage of size, as well as the buyer, does not face any competition.
Hence, he has the power to fix the price at which he is ready to buy the product or service. Moreover, the sellers have to agree with the terms and conditions of the buyer. So, it would not be wrong to say that the buyer in such a situation is the price maker.
Problems with Monopsony
This market situation is common in the case of the labour market wherein only one company exists for supplying jobs. Such monopsonies are worse because the companies seek to hire workers at lower wages, by using their power in the market.
To cope with this situation, trade unions must impose a minimum wage in the industry. Therefore, the supply of labour to the concerned industry becomes perfectly elastic. As a result, the marginal wage cost will be equal to the average wage cost.
Generally, monopsony leads to lower wages, and lower employment as compared to the competitive market
A word from Business Jargons
Above all, monopsony is characterized by a single buyer. Monopsony power enables employers to set wages which are lower than the marginal revenue product. This happens due to multiple reasons one of which is that the employer will be the single employment provider in that geographical area. Due to this, the workers are required to travel long distances to get better wages.
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