Monopsony – When There Is Only One Buyer

What It Is

A monopsony is a market structure with only one buyer (or one dominant buyer) and many sellers. It is the buyer-side equivalent of a monopoly (which is one seller). The single buyer has significant power to influence the price it pays, typically driving prices lower than they would be in a competitive market.

Monopsony Characteristics

In a monopsony, sellers have few or no alternative buyers for their goods or services.

Observable features:

• One buyer accounts for most or all purchases in the market
• Sellers accept lower prices than they would if multiple buyers competed
• The buyer can set terms and conditions unilaterally
• Sellers may operate at reduced profit margins or at a loss
• Some sellers may exit the market because they cannot survive on the buyer's terms
• Quality may decline (sellers cut costs to meet the buyer's low prices)

Common examples:

• A single large factory in a small town (the only major employer – a monopsony in the labor market)
• A national health service that is the only buyer of certain medical supplies
• A defense contractor that is the only buyer of specialized military components
• A large retailer that dominates purchasing from small suppliers in a region

Monopsony vs. Monopoly

These two structures are often confused. The distinction is simple:

A single firm can be both a monopoly (in its output market) and a monopsony (in its input market). Example: A large retailer that is the only seller of certain goods in a town (monopoly for consumers) and also the only buyer from local suppliers (monopsony for suppliers).

How Monopsony Lowers Prices

In a competitive market with many buyers, each buyer bids against others, and prices rise to the level where sellers are willing to sell. In a monopsony, the single buyer can:

• Announce a take-it-or-leave-it price
• Refuse to pay more than a certain amount
• Reduce purchases if sellers ask for higher prices
• Play sellers against each other (sellers compete to be chosen)

Because sellers have nowhere else to go, they accept the lower price rather than selling nothing.

Bilateral Monopoly

A special case occurs when a monopoly (one seller) faces a monopsony (one buyer). This is called bilateral monopoly. Examples: A single defense contractor negotiating with a single government agency; a labor union (monopoly seller of labor) negotiating with a single large employer (monopsony buyer of labor).

In bilateral monopoly, the final price is determined by negotiation, not by market forces. The outcome depends on bargaining power, patience, information, and alternatives. Prices can end up anywhere between the monopsony buyer's low offer and the monopoly seller's high demand.

Observing Monopsony in Practice