Monopsony

Monopsony

What is a monopsony?

A monopsony is a market structure in which a single buyer dominates demand for a good, service, or factor of production. That buyer—called the monopsonist—can influence prices and terms because sellers have few or no alternative purchasers. Monopsonies often appear where one employer supplies most of the jobs in a region or where demand is otherwise highly concentrated.

Etymology: from Greek monos (single) + opsonia (purchase).

Key takeaways

• A monopsony is defined by one buyer with substantial market power.
• It can depress prices paid to sellers—often lowering wages in labor markets.
• Causes include geographic isolation, limited demand, regulatory barriers, and market consolidation.
• Monopsony and monopoly are mirror images: monopoly concentrates supply power, monopsony concentrates demand power.

How a monopsony works

When buyers are scarce, the dominant purchaser can:
* Set lower prices than would prevail in competitive markets.
* Reduce the quantity bought, creating inefficiencies.
* Negotiate terms that leave suppliers with weaker bargaining power.
In labor markets, a monopsonistic employer can suppress wages and limit mobility, because workers have few alternative employers.

Characteristics

• One or overwhelmingly dominant buyer in the market.
• Sellers have limited bargaining power and few alternative buyers.
• Barriers that prevent entry by competing buyers (geographic, regulatory, capital requirements).
• Resulting market inefficiencies, such as reduced output, lower prices paid to sellers, and weaker incentives for supplier innovation.

Common causes

• Physical isolation or high transport costs that limit buyer entry.
• Low or localized demand for a product or service.
• High barriers to entry—regulatory, credentialing, or capital-intensive requirements.
• Market consolidation through mergers that shrink the buyer pool.
• Government purchasing power when the state is the principal or sole buyer.

Examples

• Agriculture in remote regions where only local processors or governments buy crops.
• A single large employer in a company town (e.g., a coal mine) that supplies most jobs and sets wages.
• Large platforms or retailers that are the primary buyer for certain goods—some analysts argue firms like Amazon can exert monopsony-like power over particular supplier markets.

Monopsony in labor markets

Monopsony arises in labor markets when one or few employers dominate hiring for specific skills or locations. Consequences include lower wages, reduced worker mobility, and weaker incentives for firms to compete on pay or working conditions. Concerns about labor-market monopsony have led economists and policymakers to propose measures such as tighter merger review for labor effects, restrictions on non‑compete clauses, and bans on no‑poach agreements.

Criticisms and policy concerns

Economists worry monopsonistic power contributes to wage stagnation, rising inequality, and lower productivity growth. Policy responses focus on restoring competitive pressure in demand-side markets: enforcing antitrust laws with attention to labor effects, limiting contractual restraints that lock workers into employers, and scrutinizing concentrated buyer markets.

Monopsony vs. monopoly

• Monopoly: single seller controls supply → upward pressure on prices faced by buyers.
• Monopsony: single buyer controls demand → downward pressure on prices received by sellers (including wages paid to workers).
  Both create inefficiencies but operate on opposite sides of the market.

Quick FAQs

Q: What are the three main characteristics of a monopsony?
A: (1) One dominant buyer, (2) absence of other buyers, and (3) barriers to entry preventing new buyers.

Q: What advantage does a monopsony provide?
A: It allows the buyer to lower the price paid for goods, services, or labor, reducing its own costs and potentially increasing margins.

Q: Is Amazon a monopsony?
A: Some experts describe Amazon as monopsony-like in specific product categories because its scale and platform give it disproportionate buying power over certain suppliers. Whether it is a full monopsony depends on market specifics and alternatives available to sellers.

Conclusion

A monopsony concentrates demand-side power in a single buyer, enabling lower prices and restricted output compared with competitive markets. That power can reduce seller welfare, suppress wages in labor markets, and weaken incentives for innovation—prompting ongoing economic and policy scrutiny.