What is Monopsony?
Monopsony consists of a market condition heavily influenced by a single buyer. It is the opposite of a monopoly – a market condition with only one seller. In monopsonies, the buyer exerts a majority of control over purchasing a good or a service, which gives them higher power during negotiations.
Monopsonies are common in the labour market in situations where only one company is responsible for supplying many jobs. Labour market monopsonies tend to be disadvantageous for workers since companies can negotiate for lower wages due to their power in the market.
The diagram below illustrates a monopsonist labour market, where only one company (the buyer) faces many workers looking for jobs (the sellers).
Advantages of Monopsony
Being a monopsonist in the labour market allows companies to achieve economies of scale and lower long-run average costs. It increases profits and returns to stakeholders.
For monopsonists who invest in R&D, capital, and/or charitable causes, it helps the rich give back to society.
Disadvantages of Monopsony
Suppliers are squeezed to settle at lower prices due to restrictions on alternatives.
Lower wages may sometimes mean that wages fall below workers’ productivity specific to the labour market. It may slow down the economy’s growth and negatively affect educational attainment.
Examples of Monopsonies in Different Markets
Food retailers exercise power when buying supplies from farmers and milk producers. For example, British Sugar buys almost the entire sugar beet crop produced in the U.K. each year. On the other hand, consumers benefit from lower prices in grocery stores.
A labour market monopsony enables the employer to set low wages and heavily influence the number of employees working.
The government is a monopsonist in employing civil servants, military, police, and naval officers. Even though a minimum wage can increase wages without increasing unemployment, it is difficult to fight for the same in industries that the institutions themselves govern.
Amazon is known for its buying power in the retail book market. Famous American economist Paul Krugman mentioned in October 2014 that by pushing down publisher prices, Amazon is hurting readers, too.
The U.K.’s NHS is a significant large purchaser of prescription drugs; however, the reduced prices can be facilitated into cheaper treatments for the public as part of the budget.