Monopsony

Background

A monopsony occurs in a market structure where there is only one buyer for many sellers. This situation contrasts with monopsony’s counterpart, the monopoly, which involves a single seller and multiple buyers. The term derives from the Greek words “monos”, meaning single, and “opsonein”, meaning to purchase.

Historical Context

The concept of monopsony was first systematically explored by British economist Joan Robinson in her work “The Economics of Imperfect Competition” published in 1933. Monopsonistic conditions have been historically less scrutinized compared to monopolies but have gained attention in labor markets and resource procurement scenarios.

Definitions and Concepts

Monopsony: A market situation with only one powerful buyer. The presence of one large buyer gives this entity a disproportionate influence over the market, allowing it to dictate terms and prices.
Perfectly Elastic Supply: A situation where the quantity supplied can change instantly, with no change in price. For a monopsonist, if the supply is not perfectly elastic, reducing the quantity demanded will lower the price.
Monopoly: A market structure where a single company or entity owns all or nearly all of the market for a particular type of product or service.

Major Analytical Frameworks

Classical Economics

In classical economic theory, monopsony is rarely discussed due to the assumption of many buyers and sellers. However, its occurrence contradicts the premise of perfect competition.

Neoclassical Economics

Neoclassical economics/analysis frames monopsonies through the lens of supply and demand imbalances. It focuses on how the imbalance allows the monopsonist to set prices lower than in a competitive market, exercising power over the suppliers.

Keynesian Economics

Keynesian economists recognize that monopsonistic conditions, particularly in labor markets, can lead to suboptimal employment levels since the monopsonist might suppress wages below the market equilibrium.

Marxian Economics

Marxian perspectives consider monopsony as an additional mechanism where capital can repress labor by limiting wage competition amongst employers, often comparing it to monopolistic capital forces.

Institutional Economics

This framework suggests that institutional settings and legal constraints can foster or mitigate monopsonistic conditions, emphasizing the role of labor unions and other collective bargaining methods.

Behavioral Economics

Behavioral economics would analyze how monopsonist’s decisions and strategies are influenced by cognitive biases and foreseeable irrational behaviors of the market participants who are not as responsive as predicted by conventional models.

Post-Keynesian Economics

Post-Keynesians emphasize the role of monopsony in wage-setting and how it leads to under-consumption and economic imbalances due to artificially depressed incomes.

Austrian Economics

Austrian economists would examine monopsony in the context of market movements, endogenous processes, and how uneven information distribution affects price-setting power.

Development Economics

In this strand, monopsony is often discussed in relation to underdeveloped agricultural or mining sectors where a single large entity dominates the purchasing of crops or raw minerals from small-scale producers.

Monetarism

Similar to monopoly, monetarist views on monopsony would investigate the inflationary impacts of monopsonistic markets, focusing on how inflationary and deflationary pressures are exerted by a dominant buyer.

Comparative Analysis

Comparatively, monopsony and monopoly share similar dynamics but operate on opposite sides of the supply-demand equation. Both exploit market power to set conditions favorable to their positions but offer differing economic ramifications: monopsony depresses prices or wages of suppliers and contractors, whereas monopolies increase prices for consumers.

Monopsony is more frequently seen in labor markets where one large employer dominates a region or industry. For instance, several logging towns had a primary employer responsible for almost all regional employment.

Case Studies

Wal-Mart’s dominance as a purchaser in retail product markets and its effect on suppliers.
Major league sports: the National Basketball Association (NBA) operates as a monopsonist in that they are exclusive buyers of high-level basketball talent in the United States.
Agricultural procurement in developing countries, where a single government body may be the buyer of major agricultural commodities.

Suggested Books for Further Studies

“The Economics of Imperfect Competition” by Joan Robinson
“Monopsony in Law and Economics” by Roger D. Blair and Jeffrey L. Harrison
“Theoretical and Applied Aspects of Monopsony” by Andrew Gilham

Monopoly: A market environment where there is only one producer or seller.
Oligopsony: A market condition where a small number of buyers exert significant control over the market prices.
Elasticity: A measure of the responsiveness of quantity demanded or supplied to changes in one of its determinants, such as price