Monopsony power occurs when a single buyer dominates a market, influencing prices and outcomes for suppliers, workers, and consumers through its purchasing decisions.
Definition of Monopsony
A monopsony is a market structure where there is only one buyer of a particular good, service, or factor of production. It is the demand-side equivalent of a monopoly, where one seller controls the supply side. In a monopsony, the single buyer has significant market power and can influence prices and trading conditions in their favour.
This buying power enables the monopsonist to pay a price lower than would prevail in a competitive market, potentially leading to inefficiencies and welfare losses.
Real-world examples of monopsony:
Large supermarket chains such as Tesco, Sainsbury’s or Asda, often dominate the purchasing of food products, giving them power over farmers and food manufacturers.
The NHS (National Health Service) in the UK acts as a monopsonist in the market for healthcare professionals, being the primary employer of doctors and nurses.
Government procurement of military or infrastructure services may also create monopsonistic conditions when only the public sector is purchasing specific goods or services.
These examples demonstrate how monopsony is not just a theoretical model but occurs in real markets with substantial implications for economic agents.
Conditions for Monopsony Power
A firm or institution will possess monopsony power when several specific conditions are present in the market. These conditions limit the ability of sellers to find alternative buyers, thus strengthening the buyer’s influence over price and terms.
1. Dominance in the Buying Market
The most fundamental condition is that the buyer must control a large share of total demand in a particular market. When one firm is responsible for most of the purchasing, it becomes the key customer for sellers.
Suppliers become highly dependent on this one buyer.
The monopsonist can then use its size and importance to drive prices down or dictate trading conditions.
This situation is common in markets where economies of scale lead to fewer, larger buyers.
2. Lack of Alternative Buyers for Sellers
The second key condition is the absence of alternative buyers. Sellers must have limited options for selling their goods or services.
In a geographically isolated market, such as a rural town, a single large employer may dominate the labour market.
For certain specialised products or services, there may be only one potential customer.
The result is a significant reduction in the bargaining power of sellers, whether they are workers, small firms, or individual producers.
These two conditions—market dominance and lack of alternatives—are sufficient for monopsony power to emerge and influence market outcomes.
Costs and Benefits of Monopsony
Monopsony has varied implications depending on who is affected. While it may increase efficiency in some cases, it often leads to distributional concerns and market distortions. Each stakeholder—firms, consumers, suppliers, and employees—experiences different effects.
Impact on Firms
Firms with monopsony power can enjoy substantial benefits:
Lower input costs: Monopsonists can negotiate prices below the competitive equilibrium, especially in markets for raw materials or labour.
Higher profit margins: The difference between low input costs and sale prices boosts profits.
Control over supply chains: The monopsonist can set strict quality standards, payment terms, and delivery schedules.
For example, a supermarket might use its position to demand lower prices from vegetable growers while enforcing packaging and labelling requirements.
However, the exercise of this power can also lead to public backlash, reputational damage, and even legal consequences if perceived as exploitative.
Impact on Consumers
The effect on consumers is mixed and often depends on whether the cost savings are passed on in the form of lower prices.
Potential benefits:
Lower retail prices: If the firm reduces prices, consumers benefit from cheaper goods or services.
Stable supply chains: Strong control can lead to consistent product availability and uniform quality.
Limitations:
Price stickiness: Monopsonists may retain most of the benefits themselves, especially in markets with inelastic demand.
Reduced innovation: Squeezed suppliers may cut back on investment in quality or new product development.
Thus, consumer benefits are not guaranteed and depend heavily on firm behaviour and market competition on the supply side.
Impact on Suppliers
Suppliers often bear the brunt of monopsony power. They may experience:
Reduced income: Monopsonists can force them to accept below-market prices, reducing profitability.
Unfavourable contract terms: This might include delayed payments, penalties for non-compliance, or obligations to fund promotions.
Investment deterrence: Uncertain revenues reduce the incentive to invest in technology or expansion.
For example, dairy farmers selling to a large supermarket may receive a price per litre that is barely enough to cover costs.
Over time, this pressure can lead to supplier exit, reduced diversity in the market, and a loss of local producers.
Impact on Employees
In labour markets, monopsony power has serious implications for employment and wages.
Wage suppression: Workers receive wages below their marginal revenue product (MRP).
Lower employment: Firms hire fewer workers than in competitive markets, reducing total employment.
Reduced job mobility: In areas with few employers, workers face limited choices, discouraging wage negotiations.
This is especially true in regions where a single large employer dominates a town’s economy, such as a manufacturing plant or public sector organisation.
Overall, monopsony in labour markets leads to inefficient and inequitable outcomes, often requiring government intervention.
Diagrammatic Analysis
Labour Market under Monopsony
In a monopsonistic labour market, the firm is the only buyer of labour and faces the market labour supply curve. Key elements include:
Labour supply curve (S): Upward sloping, reflecting the fact that higher wages attract more workers.
Marginal cost of labour (MCL): Lies above the supply curve, because to hire an extra worker, the firm must increase wages for all existing workers.
Marginal revenue product (MRP): The additional revenue generated from employing one more unit of labour. The firm hires where MRP = MCL.
Equilibrium under monopsony:
The firm hires Qm workers, where MCL = MRP.
It pays a wage Wm, taken from the supply curve at Qm.
In a competitive labour market, equilibrium would be at Qc and Wc, where supply = MRP.
Key outcomes:
Employment under monopsony is lower (Qm < Qc).
Wages are lower (Wm < Wc).
There is a deadweight loss in welfare due to reduced employment and underpayment.
Product Market with Monopsony
When a monopsonist buys goods from suppliers (e.g., food processors or manufacturers), the firm will:
Face an upward-sloping supply curve from producers.
Set quantity where marginal expenditure (ME) equals marginal benefit (MB).
Pay the price found on the supply curve for that quantity.
Key diagram features:
The ME curve lies above the supply curve due to rising costs of purchasing additional units.
The monopsonist buys Qm and pays Pm.
In a competitive market, quantity would be higher (Qc) and price higher (Pc).
Economic implications:
Lower prices paid to suppliers.
Reduced quantity traded in the market.
A welfare loss emerges similar to the one caused by monopoly pricing, but driven by a buyer rather than a seller.
Government Responses and Interventions
Policymakers often intervene in monopsonistic markets to correct inefficiencies and protect vulnerable groups such as workers or small producers.
Minimum Wage Legislation
In labour markets with monopsony power, a minimum wage can raise both wages and employment. If set appropriately:
It forces firms to pay more without reducing employment below efficient levels.
It reduces the wage gap between monopsony and competitive outcomes.
Strengthening Labour Unions
Trade unions can help restore balance by:
Collective bargaining on behalf of workers.
Negotiating wages and working conditions.
Giving workers a voice against dominant employers.
This counters the employer's monopsony power and may raise both pay and job satisfaction.
Regulatory Oversight
Government agencies can:
Enforce fair contract practices between large firms and suppliers.
Penalise abuse of bargaining power.
Investigate delayed payments, unfair returns, and exploitative clauses.
An example is the Groceries Code Adjudicator (GCA) in the UK, which oversees relationships between supermarkets and their suppliers.
Promoting Market Entry
To reduce monopsony power, authorities can encourage:
New entrants in the buying side.
Platform competition in digital markets.
Procurement diversity in public services.
This increases contestability and reduces dependency on a single buyer.
Real-World Applications
Supermarkets and Farmers
Supermarkets are often accused of exerting excessive pressure on farmers and food producers by:
Offering low prices.
Imposing costs of promotions.
Delaying payments.
In response, regulators and campaigners call for transparent contracts and fair trade standards.
The NHS and Healthcare Workers
As the dominant employer of healthcare professionals, the NHS:
Sets pay scales centrally.
Offers secure but rigid employment.
While providing job stability, it may suppress wages below what might exist in a competitive healthcare labour market.
Tech Giants and Advertising
Large digital platforms (e.g., Google, Facebook) act as monopsonists in digital ad markets:
They buy data and content from publishers.
Set terms and prices that may disadvantage content creators.
This has led to concerns over media independence, creative industry sustainability, and consumer choice.
FAQ
Monopsony power can significantly influence the perceived elasticity of supply in both labour and product markets. In labour markets, when workers face limited employment opportunities—especially in isolated or specialised regions—the supply of labour becomes more inelastic, as workers are unable or unwilling to relocate or retrain. This inelasticity enhances the monopsonist’s ability to suppress wages further, since workers are less responsive to changes in wage offers. In product markets, suppliers dependent on a single buyer also exhibit inelastic supply behaviour, as they may lack alternative outlets for their goods or face high switching costs. This allows the monopsonist to drive prices lower without facing significant supply reductions. However, if suppliers or workers have access to substitutable buyers or employers, or the ability to shift operations quickly, the supply becomes more elastic, weakening monopsony power. The overall impact depends on market structure, mobility, and availability of substitutes.
Yes, monopsony and monopoly power can coexist, particularly in vertically integrated firms or two-sided markets. A firm may act as a monopoly seller in its output market while also being a monopsony buyer in its input or labour market. For instance, a tech giant like Amazon may have significant monopoly power over its online retail platform while exercising monopsony power over warehouse labour or logistics suppliers. This dual market dominance amplifies the firm’s overall influence, allowing it to suppress input costs and maintain high output prices, thereby increasing profit margins. The coexistence of both powers can lead to significant allocative inefficiencies, reduced competition, and exploitation on both sides of the market. Regulatory scrutiny often increases in such cases, as the firm may distort market outcomes more severely than if it held only one type of power. Antitrust authorities may intervene to prevent abuses arising from these dual roles.
In practice, monopsonists set wages and employment levels by considering both the supply of labour and the marginal cost of hiring additional workers, rather than simply matching wage with marginal revenue product (MRP) as in competitive markets. A monopsonist recognises that to hire one more worker, it must increase the wage not only for that worker but for all existing employees. This means the marginal cost of labour (MCL) exceeds the wage rate. Consequently, the monopsonist hires fewer workers—where MCL = MRP—and sets the wage below MRP, leading to underemployment and lower wages. Competitive firms, by contrast, are wage takers and employ labour where wage = MRP, resulting in higher employment and wages. In real terms, monopsonists may use salary bands, non-wage benefits, or delayed promotion structures to retain staff without raising headline wages significantly. These practices further differentiate them from competitive employers.
Several factors can limit a monopsonist’s ability to exploit its market power. Firstly, labour mobility plays a crucial role; if workers can easily move to different regions or sectors, they are less dependent on a single employer. Secondly, the presence of strong trade unions or collective bargaining mechanisms can raise wages closer to competitive levels, reducing the monopsonist’s power. Thirdly, government intervention, such as minimum wage laws, supplier protection regulations, or competition policy enforcement, can restrict exploitative behaviour. Additionally, public scrutiny, media attention, and consumer boycotts may force monopsonists to adopt fairer practices to preserve their reputation. In product markets, the existence of alternative sales platforms, direct-to-consumer models, or cooperative supply chains can reduce reliance on a single buyer. Lastly, technological change and digital connectivity increasingly allow suppliers and workers to reach broader markets, reducing dependency and enhancing their bargaining position over time.
Monopsony power tends to have a negative effect on the incentives for suppliers to invest and innovate. When buyers exert downward pressure on prices and impose restrictive terms, suppliers face narrow profit margins, which constrain their ability to fund research, adopt new technologies, or improve production processes. In such an environment, suppliers may avoid risky or long-term investments, focusing instead on cost-cutting and survival. Furthermore, if monopsonists dictate stringent quality or delivery standards without providing financial support, smaller firms may lack the capital to comply. This stifles creativity and reduces diversity in product offerings, harming overall market dynamism. Over time, the market may experience reduced productivity growth, barriers to entry, and a shift towards standardised, low-value products. Some monopsonists may promote innovation through partnerships or procurement contracts with performance incentives, but such arrangements are exceptions rather than the norm. Most suppliers under monopsony conditions face systemic underinvestment.
Practice Questions
Explain how monopsony power in labour markets can lead to wage suppression and reduced employment.
Monopsony power arises when a firm is the sole or dominant buyer of labour, allowing it to influence wages and employment levels. Unlike competitive markets where firms hire until wage equals marginal revenue product (MRP), a monopsonist hires where marginal cost of labour (MCL) equals MRP, paying a wage from the supply curve. Since MCL lies above the supply curve, the wage paid is lower and employment is reduced compared to a competitive equilibrium. This results in wage suppression and underemployment, leading to allocative inefficiency and a welfare loss in the labour market.
Evaluate the impact of monopsony power on suppliers and consumers.
Monopsony power allows firms to pay suppliers below competitive prices, reducing supplier income and profit margins. This can limit investment and innovation, especially for small producers. However, cost savings may be passed to consumers as lower prices, improving affordability. Yet, this benefit is not guaranteed, as firms may retain savings to increase profit. Additionally, pressure on suppliers may lead to lower product quality or reduced choice. The overall impact depends on the extent of cost pass-through, market competition, and regulation. While consumers might gain in the short run, long-term consequences for suppliers may reduce overall market welfare.
