4/1/2023 0 Comments Flaticon market![]() However, that not only means higher wages for the marginal workers but also for the existing workers. When a monopsony firm wants to hire more workers, it has to offer higher wages. ![]() So prices can be driven down so that the price they buy will be close to the price it costs to make – leaving the supplier with little if any profit. This allows the supermarket to extract full profitability from them. So if the supermarket doesn’t buy from them, they will likely go out of business. The supermarket has the choice of 1,000 suppliers but is the only buyer that those companies can go to. These goods are supplied by over 1,000 individual companies all competing with each other. It requires products such as meats, vegetables, and dry goods. There is one large supermarket that serves Country A which has a population of 1 million. In turn, the buyer is able to use this differential in negotiating power to lower the price of their preferred house. That one buyer effectively has monopsony power as there are many options, but there is only one buyer. In fact, there is only one person that is looking to buy a house. The village is quite small and the demand to live there isn’t that high. There is a small village that has 50 houses for sale at the same time. With that in mind, the manufacturer is able to pay lowers wages as the people of the town would prefer to work for a low wage than the other alternatives. If any of the people living in the town want another job, they either have to set up a company of their own or leave town to the city. It employs most of the working-age population in the town to work for it. In that small town, there is a large manufacturing firm that makes motor vehicles. Over 1,000 people live in a small town on the east coast of the US. ![]() With that said, let us look at some hypothetical examples. In fact, we can see this is the case for many labour unions that try to fight firms with monopsony like power. What tends to happen is that the selling companies merge together to increase their negotiating power against the monopsony firm. So whilst the US government is able to maintain bargaining power, it is unable to exert the same undue influence should there be forty suppliers. For instance, with regards to fighter jets, there are only 3 companies that serve the US government. However, this doesn’t fit the definition of a monopsony as there aren’t many sellers in the market. There are also suppliers to the government, which we can consider as a monopsony. Supermarkets for instance tend to have great power over its suppliers – although this is more of an oligopoly structure, with a few buyers instead of a sole buyer. Similarly to perfect competition, it doesn’t tend to exist – although there are examples whereby companies exert monopsony like power. Monopsony Examplesįirms with a monopsony tend not to exist in the real-world, at least not to its precise definition. By contrast, a monopoly is the only seller in the market, so can charge higher prices to the buyer as they are unable to buy from anywhere else. As the sellers cannot go anywhere else to sell their goods, the buyer has the ability to go elsewhere if it doesn’t get the price it wants. Icons made by Freepik from A monopsony is the only buyer in the market, so it has the ability to put pressure on the sellers to reduce their prices. Quite simply, it is an economic transaction where there is only one buyer, but many sellers. A monopsony doesn’t just refer to the purchase of goods, but also services such as labour. However, the people of the town have no other option than to work for the company if they want an income. ![]() For example, a small town may have a large manufacturer that it relies on for employment. In turn, these two terms create the word ‘monopsony’ which simply means one buyer.Ī monopsony is where there is only one buyer of a good. We then have the second part, the word ‘opsōnéō’, which means ‘to buy’. The first of which is the term ‘Mono’, meaning ‘one’. The term ‘monopsony’ is of Greek origin and comes in two parts. This contrasts with the similarly named monopoly, whereby there is only one seller and many buyers. In turn, the buyer, the supermarket, is able to exert power over such suppliers who have nowhere else to go. Farmers may only have the option to sell to the local supermarket as it’s unpractical to sell to the next closest one. For example, supermarkets are often seen to have a monopsony over local suppliers. Copy the Attribution License: Font generated by Boyce Posted in Microeconomics > Market StructureĪ monopsony is where there is a sole buyer of a product, with many sellers. ![]()
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