Monopsony: A Market With One Buyer

In a monop­sony mar­ket, a sin­gle buyer is the main pur­chaser of goods and ser­vices offered by many sell­ers. Since there is one buyer and many sell­ers, the buyer has sig­nif­i­cant con­trol over the mar­ket, and in some cases, prices are decided by the buyer rather than the sell­ers.

Monop­sony power gen­er­ally exists in the fac­tor mar­ket, the mar­ket for pro­duc­tion ser­vices, which includes labor, cap­i­tal, land, and raw mate­r­ial used to make prod­ucts.

Main char­ac­ter­is­tics of a monop­sony mar­ket#

• A buyer’s monop­oly is pos­si­ble because sell­ers have no alter­na­tive buy­ers to sell their ser­vices. A clas­sic exam­ple is a coal-min­ing town. A com­pany that owns the coal mine (employer or buyer) can set lower wages for a worker in mines (seller of skills) because they face no com­pe­ti­tion from other employ­ers in hir­ing the worker.
• A monop­sony, or buy­er's monop­oly, has high bar­ri­ers to entry, because of high start-up costs and because estab­lished buy­ers enjoy lower aver­age costs than new­com­ers could.
• Firms with monop­sony power can earn above-nor­mal prof­its and take a large share of the total gain, at the cost of low wages and poor work­ing con­di­tions.

Exam­ple of Monop­sony Mar­ket#

Super­mar­ket chains like Wal­mart or Tesco have greater pur­chas­ing power and often nego­ti­ate with sup­pli­ers to buy at lower prices. Sup­pli­ers such as farm­ers or milk pro­duc­ers often have few other buy­ers and have to accept the terms. Buy­ing cheaply from sup­pli­ers and sell­ing at a good mar­gin to shop­pers helps these chains earn strong prof­its and gain mar­ket share.

Key terms#

Mar­ket share

Mar­ket share rep­re­sents the per­cent­age of an indus­try, or a mar­ket's total sales, that is earned by a par­tic­u­lar com­pany over a spec­i­fied time period.

Com­mon ques­tions#

How does monop­o­lis­tic com­pe­ti­tion work?#

Monop­o­lis­tic com­pe­ti­tion is a mar­ket in which many sell­ers offer sim­i­lar prod­ucts, but each sell­er's prod­uct dif­fers in some way from the oth­ers in the minds of con­sumers.

So each seller is a monop­o­list of its own dif­fer­en­ti­ated prod­uct: buy­ers can get that par­tic­u­lar prod­uct only from that seller. How­ever, many close sub­sti­tutes are avail­able.

Shop­pers there­fore com­pare both prices and per­ceived qual­ity, and sell­ers com­pete for mar­ket share. As you can see, in this mar­ket struc­ture, a set of com­pa­nies com­pete against one another while main­tain­ing monop­o­lies over their own prod­ucts.