Oligopsony – definition and meaning

An oligopsony is a market in which there are few buyers but many suppliers. This makes it a buyer’s market. In an oligopsony, the few buyers are usually large and powerful. Consequently, the buyers exert a considerable influence over the sellers. In fact, in some cases, if they drive down prices, the suppliers have no choice but to comply.

An oligopsony contrasts with an oligopoly, which is a market with few suppliers and lots of buyers. In an oligopoly, the suppliers control the market, and ultimately, prices.

An oligopsony is a form of imperfect competition. Oligopolies, monopolies, and duopolies are also forms of imperfect competition.

A monopoly is a market in which there is just one seller. A market with just two sellers is a duopoly.

Fast-food industry – an oligopsony

In the fast-food industry, for example, there are a few giant buyers. Burger King, McDonald, Wendy’s, and a couple of others in the United States control the meat market.

The fast-food giants dictate terms when negotiating with their suppliers, i.e., farmers. They even influence labor standards and animal welfare conditions.

Oligopsony - image with explanation and example
Farmers today complain that supermarkets are pushing their prices too low.

Oligopsony – retail grocery

Since the late 1980s, supermarkets in the advanced economies globally have acquired a growing share of the grocery market.

As their market share has grown, so has their influence over suppliers.

Consequently, today, giant supermarket chains dictate what food farmers grow. They also dictate terms with food processing and packaging companies.

In fact, supermarkets impact the lives and incomes of hundreds of millions of people globally.

Additionally, the consolidation of retailers means that they can exercise considerable market power. In some parts of the world, this has led to allegations of illegal and unethical conduct and abuse.

Cocoa and tobacco – few buyers

Cocoa is another example of an oligopsony. Just three companies buy most of the cocoa beans that farmers grow globally. These companies are Barry Callebaut, Archer Daniels Midland, and Cargill.

Most of the cocoa growers are farmers in the third world.

Altria, Lorillard Tobacco, and Brown & Williamson buy nearly 90% of the tobacco that US farmers grow.

According to ft.com/lexicon, an oligopsony exists when:

“When demand for a particular product is dominated by a few buyers, which are therefore able to control prices and output – though they would normally have to take each other’s decisions into account.”