How a Monopsony Works: 3 Examples of Monopsonies

A monopsony is an imbalanced market condition where a single buyer dominates the market of sellers. Due to the imbalance of power that the monopsony model creates, standard economic principles of supply and demand cease to govern the market. Instead, the monopsonist has the power to determine prices, set wages, and impose particular terms on sellers.

A monopsony directly contrasts a monopoly or monopolist, which is a market condition where a single seller dominates the market of buyers. Related terms include oligopsony (in which many buyers band together for outsized market power) and oligopoly (in which many sellers band together for outsized market power).

Here’s a breakdown of how a monopsony works:

1. 1. Competitive market conditions exist: In free market conditions of perfect competition, the natural competitive forces of the economy control every aspect of daily economic life, including prices, supply, demand, wages, and unemployment.
2. 2. A monopsony forms: Monopsonies can arise out of several different conditions. In some cases, when one business becomes much more successful than others in its field, it becomes a monopsony over the labor market by controlling a much larger portion of labor capital. In other cases, businesses may merge or band together to form a single entity of buying power, effectively overcoming the power of individual sellers. Sometimes, contractual obligations like non-compete clauses can restrict sellers from certain market activities, creating a monopsony for the buyers.
3. 3. The balance of power shifts: Once a monopsony arises, the balance of power shifts—whereas before, the economy relied on natural competition, now the monopsony can exercise its outsized bargaining power (called “imperfect competition”) and make major changes in prices, supply, demand, and wages. In cases where one business (the buyer) has a major advantage over the workforce (the sellers of labor), the business can engage in wage suppression and other wage effects to minimize the marginal costs of labor and cause higher profits. In cases where one entity has a monopsony over a particular good (as can often be the case for raw materials), the sellers of the good reduce prices or agree to unfair terms to continue doing business with the buyer.
4. 4. The government may step in: In many cases, when a monopsony arises, federal or market forces may step in to break up the imbalance of power, using economic policies like antitrust laws or minimum-wage requirements (which require higher wages or wage increases for the lowest-wage workers) to restore the market structure.

Monopsonies can come in a few different shapes. Here are some examples:

1. 1. A tech company controls a majority of the workforce. One of the most common real-world examples of monopsony power is in labor economics when a single company (the buyer) controls the hiring for a majority of the workforce or labor supply (the sellers). When workers don’t have other places to apply for jobs in their fields, they’re forced to work for the abnormally powerful tech company and may agree to terms that aren’t ideal, including lower wages or reduced benefits or health care. This power manifests on a graph as an upward-sloping labor supply curve (rather than an infinitely elastic one), reducing labor supply elasticity—how the labor supply changes in response to wage changes—and increasing the number of low-wage workers.
2. 2. A coffee company buys most of the coffee bean production. In some cases of monopsonies, a single buyer has unfair control over sellers in a related industry. For instance, a coffee company that buys the majority of coffee bean crops each year is a monopsony. Coffee bean growers may agree to lower prices or increase buying perks to attract the business of the coffee company—if they don’t, they run the risk of missing out on the transaction and having nowhere else to sell their crop.
3. 3. Companies band together to influence the prices of materials. Sometimes, multiple companies in a particular field come together to form an aggregate monopsony known as an “oligopsony,” acting as one entity and increasing their power over the sellers. In these cases, sellers catering to the oligopsony are under the same restrictions as under a monopsony. They may have to reduce prices or agree to unfair terms to keep the business of the powerful buyer.

Monopsonies and monopolies are related economic terms that describe imbalanced market power conditions. In monopsonistic conditions, the majority of the power rests with a single buyer. In contrast, the majority of the monopoly power rests with a single seller in monopolistic conditions. Learn more about monopolistic competition.

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