What is a monopsony? Definition and meaning

The definition and meaning of monopsony, often referred to as a buyer’s monopoly, is either a market where only one buyer exists, or where a single buyer dominates the market. The term refers to just the number of buyers – in this type of market there are many suppliers. The monopsonist can call the shots regarding prices, product description, delivery dates, etc. 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 – one in which a single major company, organization or entity is by far the biggest employer in a town.

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.”

Monopsony in Medieval timesHundreds 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, followed by the Church. He had total power and could determine how much people were paid for their work and goods.

The term ‘monopsony’ was first used publicly in the English language in 1933, when Joan Robinson published her influential book The Economics of Imperfect Competition.

Joan Robinson (1903-1983) was a British economist well known for her contributions to economic theory. She was regarded as one of the 20th century’s greatest economists. Ms. Robinson credited Bertrant 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. In the US and UK, 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’ and in American English ‘Defense”)

Bethesda-based Lockheed Martin, America’s largest defense company, employing more than 120,000 workers, would be just a tiny fraction of its current size had it not been for the orders from its largest client – the US Department of Defense.

US government contracts represent eighty-five percent of Lockheed Martin’s yearly sales, while those from foreign governments account for thirteen percent. Commercial contracts only make up 2% of the company’s total sales.

Pros and Cons MonopsolyA 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; which many see 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 Robinson monopsonyJoan Violet Robinson FBA (1903-1983), born in Surrey, England, is regarded today as 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.

Video – A monopsony – Definition and Meaning

In this video, the speaker explains what some of the features of a monopsony are, especially in the labor market where a major employer in an isolated town employs most of its workers.