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MONOPSONY

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Definition:
A monopsony consists of a market with a single buyer. When there are only a few buyers, the market is defined as an oligopsony. In general, when buyers have some influence over the price of their inputs they are said to have monopsony power.

Context:
Monopsony (or oligopsony) in and of itself is not often of concern in competition policy, although it does imply a lack of competition. It becomes more relevant when combined with monopoly or oligopoly, that is with monopoly power.

One common use of the notion of monopsony power arises in the context of defining market structure. For example, in cases where monopoly power is the issue, it may be useful to examine the extent to which such power is offset by powerful buyers. This is sometimes referred to as countervailing power. The ability of a firm to raise prices, even when it is a monopolist, can be reduced or eliminated by monopsony or oligopsony buyers. To the extent that input prices can be controlled in this way, consumers may be better off.

A second important use of the concept of monopsony power arises in cases of vertical integration and merger. It is generally agreed that where monopsony power exists, there will be an incentive for vertical integration. Moreover, under some circumstances it can be shown that vertical integration, even when it occurs between a monopolist and a monopsonist (bilateral monopoly), can increase economic efficiency.

Source Publication:
Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.

Hyperlink:
http://www.oecd.org/dataoecd/8/61/2376087.pdf

Statistical Theme: Financial statistics

Created on Thursday, January 3, 2002

Last updated on Saturday, March 16, 2002