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What Is a Monopsony?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 06 April 2014
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A monopsony is a situation in which a single buyer has to choose between many different sellers. A market of this type is the opposite of a monopoly, where a lone seller offers goods and services to many buyers. Economists tend to consider a monopsony an example of imperfect competition, since it has the potential to undermine the general stability of an economy, and eventually lead to hardship for the populace in general.

One of the main dangers of a monopsony is that the type of market condition places a great deal of control in the hands of the buyer. Since the buyer has many different options when it comes to making purchases, it is possible to demand lower pricing from any of the suppliers. If the pricing is too low, then some of the suppliers will be unable to earn enough profit off the sales to cover the costs of production. When this happens, the suppliers go out of business, and thus increase the rate of unemployment in the locations where the company maintained operations.

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A monopsony can develop in just about any industry. For example, a retailer who is able to drive other retailers out of business, due to their low prices, may shortly become the main source of goods and services within a community. This status allows the retailer to command lower pricing from its suppliers. With no other buyers in the area, the suppliers have no recourse but to comply with the terms of the monopsonist. At the same time, the monopsony is free to charge its customers any price desired, since there is little to no competition in the immediate area.

Single-payer health care systems may also function as a monopsony. This is especially true if no private care systems are able to compete with a government owned and operated health care system. If the government system is the only real buyer of health care services within the area, hospitals, healthcare practices of different types, and even medical supply providers have no choice but to comply with the terms dictated by the single buyer.

In many cases, a monopsony has a great deal of control when it comes to setting wage averages for the communities where it operates. If there are no competitors to the monopsony, then the opportunities for employment for people living in the area are extremely limited. The end result is that the sole buyer can offer the lowest wages allowed by any government regulations, stay within the limits of the law, and maximize its profits. Unfortunately, this also often means that employees of the sole buyer live at poverty level, and are unable to gather the resources necessary to escape their current circumstances with the use of higher education or vocational training that would allow them to seek employment elsewhere.

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