What is a monopsony? Definition and meaning
A monopsony is either a market where only one buyer exists, or where a single buyer dominates the market. We often refer to it as a buyer’s monopoly. The term refers to just the number of buyers. In this type of market, there may be many suppliers.
The monopsonist can call the shots regarding prices and product description. They can also dictate terms regarding delivery dates.
Some people say that monopsony is a back-to-front monopoly. A monopoly is a market where there is just one supplier.
Monopsony may also refer to the job market, i.e., one where a single entity is a town’s largest employer.
According to the Financial Times’ glossary of terms, a monopsony, by definition, exists:
“When a single buyer controls the market for a particular good or service, in essence setting price and quality levels, normally because without that buyer there would not be sufficient demand for the product to survive.”
Hundreds of years ago, every village in Europe was a monopsony. In the British Isles, for example, the Lord of the Manor was by far the main employer and purchaser of goods and services. The Church was the second-largest employer. The Lord had total power. He could even determine how much to pay people their work and goods.
The term ‘monopsony’ appeared publicly in the English language in 1933. Joan Robinson used it in her influential book The Economics of Imperfect Competition.
Joan Robinson (1903-1983) was a British economist, famous for her contributions to economic theory. She was one of the 20th century’s greatest economists. Ms. Robinson credited Bertrand Hallward (1901-2003), a Classics don at Peterhouse, Cambridge, for coining the term.
Monopsony in defense industry
In the advanced economies, such as the United States, the defense industry is a monopsony. The American and British the Department of Defense and Ministry of *Defence respectively represent the vast majority of all domestic sales of the country’s home-based defense companies.
* In British/Canadian/Australian/Irish English, the spelling is ‘Defence,’ while in American English it is ‘Defense.’
Bethesda-based Lockheed Martin, America’s largest defense company, employs more than 120,000 workers. It would be just a tiny fraction of its current size had it not been for the US Department of Defense.
US government contracts represent eighty-five percent of Lockheed Martin’s yearly sales. Those from foreign governments account for thirteen percent. Commercial contracts only make up 2% of the company’s total sales.
We often use the term B2G when referring to government contracts. B2G stands for business-to–government.
A monopsony is usually a less than ideal situation, which sometimes requires legislation to prevent abuse. However, monopsonistic-type behaviors by, for example, supermarkets, result in cheaper prices for consumers. Subsequently, many people see it as a benefit.
Monopsony battles for business
In a monopsony, suppliers frequently engage in price wars to try to gain business from the single buyer. Their behaviors drive down prices.
Companies that battle each other in a one-buyer market commonly get caught in a ‘race to the bottom,’ during which they lose any power they used to have over supply and demand. They end up totally at the mercy of the monopsonist.
Some technology companies have been accused of monopsonistic-type behaviors in the labor market. For example, the market for engineers may consist of just a few giant tech companies which collude and choose not to compete with each other regarding wages, perks, and other workplace conditions.
Oracle and Cisco have sometimes been accused in the media of discreetly agreeing not to compete on wages.
By effectively creating a wage cartel, pay is suppressed so that tech giants can realize lower operating costs and greater profits. In such cases, the collusion by a group of large companies is, in effect, a monopsony.
Joan Violet Robinson FBA (1903-1983), born in Surrey, England, was one of the greatest economist of the last century. She studied economics at Girton College, Cambridge, where she came under the influence of Maurice Dobb, a Communist Party member. Later as a member of the ‘Cambridge School,’ she contributed to the support and exposition of Keynes’ General Theory. (Image: Wikipedia)
Examples of monopsony
Monopsonies or monopsonistic type behaviors exist all over the world.
In many countries, electricity generators can negotiate lower prices with suppliers of coal and/or gas.
Giant supermarkets often behave like monopsonists, even though they are not the only buyer. They have virtually absolute power when purchasing goods from milk producers, farmers, wine growers and other suppliers.
A country’s largest car-rental firm that is negotiating with a supplier of cars may exhibit monopsonistic-type behaviors. It is probably by far the supplier’s largest client and is in a position to dictate terms.
In the United Kingdom, the National Health Service represents more than 90% of the purchases of all drugs, medical devices and other health-related products and services.
Amazon.com is emerging as the Goliath of the retail sector. It currently gets a better price than any other bookseller and most sellers of other goods.
Monopsony is one of the features of Imperfect Competition. Imperfection competition exists in a competitive market where some of its features or sectors are not completely competitive. There may be too few sellers or buyers.