- A pure monopsony is defined as a market where there is only one buyer for a good/service, or labour.
- Monopsony power occurs when a buyer faces little competition to purchase a good/service, or labour, and can reduce the prices or wages they pay compared to a competitive market.
Monopsony Examples & Explanation:
While a monopoly is when there is only one seller in the market, a monopsony is when there is only one buyer. For example, the UK Army is likely the only organisation buying nuclear warheads in the UK. Similarly, for the labour market, the UK Army is the only organisation recruiting soldiers in Britain. When there are limited buyers or employers, the bargaining power of the buyer enables them to suppress prices paid to suppliers (monopsony power). Such is the case for many agricultural products such as coffee bean or milk farmers, where they sell their products to large multinational corporations. When large corporations pressure suppliers (e.g. farmers) to reduce prices, this helps them create cost savings that can be passed onto consumers. However, it can also force suppliers out of business, causing them to reduce product quality to meet lower prices. For example, when supermarkets reduced prices they paid for beef, it contributed to the horsemeat scandal in the UK, where beef farmers substituted horsemeat for beef to sell to supermarkets so they do not go out of business. Similarly, when monopsony employers such as the National Health Service (NHS) in the UK suppress wages of nurses/doctors, this may damage the quality of the service when less employees are hired at a lower salary. This is because it may lead to staff being overburdened with work and a reduction in staff retention rates.
Monopsony Notes with Diagrams/Graphs:
Want a closer look? Download these Monopsony notes.
The left video explains the impact of a Monopsony in the labour market, and the right video explains how a trade union may be able to counteract that.