Contents
Definition and examples
A monopsony is when there is a dominant buyer of a good.
This is different from a monopoly, which is when there is a dominant seller of a good.
In a monopsonistic market, the market power of the buyer can be used to lower the price of the good being bought.
Here are four examples of monopsonistic markets:
1. Some labour markets
In a labour market, monopsony means there is a dominant “buyer” (employer) of labour.
At the industry level, examples include the labour market for nurses and doctors, whose dominant employer in the UK is the National Health Service (NHS).
Other monopsonies exist in labour markets, including at the local level. A large factory may be a dominant employer for a small town for example.
In theory, monopsonies can use their market power to lower wages.
The Competition and Markets Authority has reported on monopsony power in the UK’s labour markets. It finds that in the most concentrated labour markets, wages are 10% lower on average versus the least concentrated markets, when comparing similar workers.
2. Amazon
Amazon has monopsony power in both product markets and labour markets.
For product markets, suppliers of goods such as toys, books, technology and other items often list their products on Amazon. Indeed for the US e-commerce market in 2020, about 50% of sales take place through Amazon.
As for labour markets, Amazon warehouses can be a dominant employer in particular regions. This includes the facility in Bessemer, Alabama in the US and the Rugeley Staffordshire site in the UK (which is being moved to Sutton Coldfield).
3. Sugar
British Sugar is the sole buyer of sugar beet in the UK.
The National Farmers’ Union (NFU) has historically bargained on behalf of the 3,000 sugar beet producers in the UK to agree on a sugar price.
In November 2023, British Sugar tried to negotiate directly with sugar beet suppliers, bypassing the NFU.
4. App stores
App developers for mobile phone apps often need to sell their apps on app stores, such as Google Play and the App Store, to find customers.
To reach iOS users, developers need to sell through Apple’s App Store.
There has been controversy over the up to 30% fees that Apple has been taking from developers for listing games on their app store.
Epic Games, the developer of Fortnite, sued Apple for these high fees.
What are the effects of a monopsony?
The key consequences of a monopsony are:
The monopsonist firm:
- Lower costs.
- The monopsonist uses its buying power to negotiate lower prices on its inputs with suppliers or lower wages with workers.
- As a result the monopsonist experiences higher profits.
- Fall in quality
- Suppliers make less supernormal profit and so reinvest less in improving product quality.
- As suppliers to the monopsonist may shut down, this could reduce the availability of key inputs.
- This could result in shortages or disruptions to the supply chain.
- Risk of intervention from regulators.
- If the regulator believes monopsonist is abusing its market position by reducing prices for suppliers, it could intervene with fines or other sanctions.
Suppliers or workers:
- Lower wages or prices for inputs.
- Lower quantity of inputs demanded (or lower employment in the case of workers).
- This leads to lower revenues, which reduces profits for suppliers.
- So suppliers may shut down or workers may leave the job market and work in a different sector.
- Suppliers have a guaranteed market for their product.
- The monopsonist firm, who can earn supernormal profits, is less likely to go out of business.
- This gives a supplier a more reliable source of demand for their inputs.
- However, relying on one client may also lead to instability.
- If the monopsonist suddenly reduces demand for the input, suppliers who are dependent on the monopsonist could shut down.
- Strike activity may be more likely, for example in the NHS, as lower pay leads to pay disputes.
Consumers:
- Lower prices, if the monopsony firm passes on its lower costs to consumers.
- Lower quality of final goods
- As the monopsonist puts pressure on suppliers to cut costs. suppliers may cut back on quality and innovation to bring costs down.
- However if supernormal profits from the monopsonist are reinvested in improving product quality, consumers may be better off.
- Reduced choice for consumers as some suppliers may shut down.
Evaluation points for monopsony
The consequences of a monopsony depend on:
- The level of regulation. A minimum price or wage may prevent firms from exploiting their monopsonist position by lowering prices or wages.
- Whether suppliers form cooperative groups or workers form trade unions. So called “bilateral monopoly” may strengthen suppliers’ bargaining power, leading to higher prices and wages.
- The business objectives of the monopsonist firm. If the firm aims for sales maximisation instead of profit maximisation, then prices for inputs are less likely to fall.
- How monopsonists use their supernormal profit (for investing back into the firm or for shareholder dividends).
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