written by | November 2, 2022

What is Monopsony - Meaning, Features and Operations

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There are many market conditions prevailing in the economy for different kinds of goods sold depending on the number of sellers available in the market and the number of buyers willing to buy that product in the market. Monopsony is a rare market condition that is rarely found in real life. It is a market condition where there is only a single buyer for the good or product being offered for sale. Many sellers are selling that particular good, which is why the buyer is said to be in complete control of this market situation. 

Did you know? A prime example of Monopsony's market structure is the Ministry of Defence. 

The Concept of Monopsony

Monopsony refers to a market situation with only a single buyer for a particular good and service. There are many sellers in the market selling that specific good or service. In this market situation, the single buyer controls the market, and his actions influence the price of the relevant product or service. The single buyer is considered the dominating entity in this market structure.

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Key Takeaways of the Monopsony Market:

  • It is similar to a monopoly market. Instead of the seller in the monopoly market, the buyer’s actions or market behaviour influences the product's price.
  • In this market situation, the employer pays different wages to different worker groups for the same work.
  • In this market condition, the buyer can determine the price of the different factors of production.

Overview of the Monopsony market and Monopsony Labor market

Monopsony is considered an Imperfect Market condition, which means it does not follow free market forces of Demand and Supply while determining prices. Let’s understand the Monopsony market with the help of a graph:

The interpretation of the above graph is as follows:

  • As shown in the graph above, The factor prices (FP) are deemed to be fixed, which is why in the above graph, the Demand( D)/ Marginal revenue product is equal to the supply (S) of the Product.
  • In the above graph, The MFC curve, or the Marginal Factor cost curve, is steeper than the supply curve. This indicates that any further rise in the factor costs will result in a much higher increase in the Marginal Factor Cost (MFC). Here, Marginal Factor cost refers to the increase in the total costs rendered for a factor of production resulting from a one-unit increase in the total amount of factor employed in the production process.
  • The quantity of a factor of production involved at which the profit would be deemed to be maximum will be at the point where the Marginal Revenue for the Product will be equal to the marginal cost, i.e. shown as FQm in the graph.
  • Plotting the line from point P to the supply curve, the intersection point will determine the price of the factors of production, which is FPm. In this situation, we can conclude that MFC=MRP and the profit are deemed maximum.

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Monopsony in the Labor Market

Monopsony in the labour market is when one entity generates many jobs in a particular market. Let’s understand with the help of a graph:

  • In the above-given figure, under the said perfect competition market structure, wages (W) would be fixed when demand (D) divided by Marginal Revenue of labour (MRL) is somewhat equal to the given supply of labour.
  • In this situation, The marginal labour cost (MLC) curve is steeper than the supply curve. It states that any further increase in the cost of labour or growth in the wages of additional labour will later result in an increase in wages for all the labourers.
  • The profit will be deemed to be maximum at the quantity of labour corresponding towards the point where the marginal revenue will be equal to the marginal cost, i.e. shown with FQm in the above graph.
  • The labour wage is understood by drawing a line from point P, where we can see that MLC= MLR corresponds to the given supply curve (S). The supply curve intersection determines the wage of the labourers.

A monopsony is generally termed as a vast entity or a firm with generous buying capacity and the ability to influence the market with its behaviour. In the monopsony market scenario, the producers and the suppliers are left with little or negligible alternatives, which eventually leads to the high bargaining capacity of the buyer, leading to a reduction in the prices of factors involved in the production, causing an increase in the profit margin of the firm or the company. Factor price is generally the per unit price of a factor of production, like labour and capital. 

Example of Monopsony Market

Monopsony market condition is prevalent in some markets, which are as follows:

  • The defence sector is a prime example of a monopsony market structure where the government is the sole buyer of arms and ammunition for the army and can dominate and influence prices since there are many sellers in the market. In the case of India, the Central Government is the sole buyer or monopsonist when it comes to the domestic defence manufacturing sector
  • Walmart, a food supermarket retail giant, is a prime example of Monopsony Market structure. Since it is a vast retail chain with stores spread across the globe, The buying capacity of Walmart is immense due to the availability of substantial financial resources at its disposal. Thus, Walmart can control the price at which the farmers sell their produce.
  • Amazon is considered, by some experts, to be a part of the monopsony market structure since it is the largest and, in some situations, the only buyer of specific goods and services, which it later sells on its platform. Since Amazon is the only buyer of particular goods and services, its decisions and actions can influence or dictate the prices of those goods it pays for and, later on, sells on its platform.

Prime characteristics to identify a monopsony market structure 

  • It is a market structure where one firm or entity is demanding or purchasing all of a particular good or service available in the market.
  • Only a single buyer purchases all the goods available in the market. No other buyer for that product is available in the market.
  • There are immense barriers for new firms or entities to enter the market. Due to huge operational costs, large investments are required, and sufficient capital inflow is required to ensure the business functions smoothly. They can take the shocks of the economic cycle like downswings or recession.
  • Monopsonies, just like the monopoly market structure, are inefficient or not dependent on the free market forces of demand and supply, which is an essential element of the monopsony definition.

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Monopsony market structure and primary advantages 

  • Since there is a single buyer, he can control the price and decrease the prices of the goods and services he has bought.
  • The reduction in prices will eventually lead to a reduction in costs, and employers will have to curb their costs on the factors employed in the production process, leading to earning a higher share in profits.

Conclusion

The article was about the monopsony market structure, its functionality, and the monopsony labour market functionality. The primary intent is for the reader to gain the required knowledge about the monopsony market structure and the real-life examples of this market structure being prevalent in the economy.
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FAQs

Q: Is Amazon considered a Monopsony?

Ans:

Amazon is considered, by some experts, to be a part of the monopsony market structure since it is the largest and, in some situations, the only buyer of certain goods and services, which it later sells on its platform. It can dictate or influence the price of goods it pays for and later sell them on its platform.

Q: State an advantage of monopsony for employers.

Ans:

A single buyer will reduce prices for the goods. Hence, employers will need to curb costs on factors, increasing their profit margin.

Q: State Two characteristics of the Monopsony market structure.

Ans:

Two characteristics of monopsony are 1. It is a market structure where one firm or entity is demanding or purchasing all of a particular good or service available in the market 2. Only a single buyer purchases all the goods available in the market. No other buyer for that product is available in the market.

Q: What is Monopsony's market structure?

Ans:

Monopsony refers to a market situation with only a single buyer for a particular good and service. There are many sellers in the market selling that particular good or service.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.