Monopsony

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Monopsony

A Monopsony is a market condition that occurs when a large buyer controls a large proportion of the market and drives prices down. In a Monopsony a single firm has market power through its factors of production. The firm is the dominant purchaser from multiple sellers and drives down the price of the seller’s products or services according to the amount of quantity that it demands.

Monopsony exists in both product and factor markets. Examples of an existing Monopsony market are-

  1. New food retail giants coming up in India like Big Bazzar, Spark even online retailers such as Big-basket, Grofers have a power when purchasing goods from the farmers and also dictate their terms to smaller suppliers. In the case of supermarkets price paid to suppliers is often forced down so that the supermarkets can reduce costs and generate higher profits. In an increasingly globalized world the supermarkets are free to source supplies from around the world, thus making it difficult for smaller suppliers to compete
  2. Amazon’s buying power in the retail book market – it gets a better price than other booksellers and this gives it a significant competitive advantage, as per the current statistics Amazon is the biggest retail book seller in the world.
  3. The government is a major buyer in military procurement and can also use this to bargain contractual prices.
  4. De Beers, the diamond producer, and the major employer of diamond workers in South Africa, dominates the labour market and their wages working in its mines.
  5. Electricity generators can negotiate lower prices for coal and gas supply contracts.
  6. Some technology companies have been accused of Monopsonistic-type behaviors in the labor market. 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.

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.

Understanding Monopsony in labour market

In a perfect competitive market wages of the workers is set where demand (D) equals supply (S), i.e. at Q1 W1. However in a Monopsonic market, the single buyer chooses to pay lower wages and hire less number of workers.

In the above diagram, we see an upward sloping supply curve- i.e. in order to hire more labours, the firm needs to increase the wages. Therefore, the marginal cost of employing (MCL) one more worker will be higher than the average cost because to employ one extra worker the firm has to increase the wages of all workers.

As the Monopsonist is trying to maximize the profits, it will employ only that number of labours, where it reaches its equilibrium. Equilibrium arises where MCL = MRP, i.e. Marginal cost of labour equals Marginal Revenue product. Hence employing Q2 labour, but pays only W2 wage, thus exploiting the labour in return and gaining extra economic surplus.

Advantages of Monopsony market

  1. Improved value for money- lower input cost would mean cheaper goods.
  2. Lower input costs will raise profitability that might be used to fund capital investment and research.
  3. Consumer gains from lower prices.
  4. A useful weight-counter to selling power to a monopolist.

The only way Monopsony matters is that is transfers its “Consumer Surplus”(additional benefit gained by the consumer from the purchase of the goods or services beyond the price paid for it) to economic profit.

As the Monopsony power of these new age companies (example- Amazon, Uber, Big-basket, Swiggy etc ) is increasing –its leading to more wage discrimination and more value added by workers is getting transferred to owners of capital for whom they work. The consequence of Monopsony is fundamentally a distributional one that contributes to the rise in earnings inequality.

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