Overview
A monopsony is a market structure in which a single buyer faces many sellers. The buyer’s dominance gives it substantial influence over the price it pays and the quantity it purchases. While the mirror image of a monopoly (a single seller), the economic problems and policy responses for monopsonies are distinct. The term was introduced by economist Joan Robinson in 1933 and has since been applied to goods, services and factor markets, especially labor.
How monopsony works
In a monopsony the buyer encounters an upward-sloping supply curve from sellers: to obtain more of the good or input the buyer must bid higher prices or offer better terms. Because each additional unit purchased raises the price not only for that unit but potentially for all units bought, the buyer’s marginal expenditure exceeds the purchase price. A profit-maximizing monopsonist purchases where its marginal value (marginal benefit) equals marginal expenditure, which typically results in lower prices and smaller quantities than in a competitive market.
Characteristics and theoretical implications
- Buyer market power: the single purchaser can influence terms of trade and wages.
- Suppressed prices or wages: suppliers receive less than in competitive markets.
- Reduced output or employment: the monopsonist purchases fewer goods or hires fewer workers than would occur under competition.
- Deadweight loss: allocation is inefficient because mutually beneficial trades may not occur at monopsony prices.
History and development
The concept of monopsony was formalized during the 20th century as part of the study of imperfect competition. Joan Robinson popularized the term and analyzed how a dominant buyer could distort markets in ways analogous but not identical to a monopoly. Empirical work and policy discussion expanded in later decades as researchers examined labor markets, public procurement and regulated sectors for signs of buyer market power.
Examples and applications
Common contexts where monopsony power is observed or alleged include:
- Labor markets in towns dependent on a single large employer or in specialized industries where few firms hire a particular skill.
- Public procurement when a government or state-owned agency is the primary purchaser of goods or services, such as defense procurement or certain health-care purchasing arrangements.
- Regulated sectors like public transport when a single authority awards contracts or operates services directly.
Consequences and policy responses
Because monopsony can lower incomes for suppliers and reduce output, policymakers may respond with competition policy, collective bargaining support, minimum price or wage floors, or rules that facilitate entry of additional buyers. Remedies seek either to limit buyer market power or to raise the price to suppliers closer to competitive levels without producing undesirable side effects.
Distinctions and notable facts
Monopsony differs from monopoly: a monopoly restricts supply and raises price for consumers, while a monopsony reduces demand and lowers price paid to suppliers. There is also the bilateral monopoly, where a single seller and single buyer negotiate terms. For further comparison see the entry on monopoly.
Understanding monopsony helps explain wage-setting, procurement outcomes and how market power can operate from the buyer side as well as the seller side.