Posted in Finance, Accounting and Economics Terms, Total Reads: 88
Monopsony is similar to monopoly where there is only one buyer and too many sellers, and the buyer has the power to control the prices i.e. in monopsony buyer has bargaining power in their market which empowers them to negotiate with sellers to lower the prices leading to higher profit margins. Monopsony is present in labour as well as product market.
Characteristics of Monopsony:
• One Buyer - In an ideal monopsony, generally there is only one buyer who buys all the product or service. Producers or sellers can be many but all of them have only one custom-er.
• No Alternatives - Since there is only one buyer, sellers don’t have any alternatives and hence have to fulfill the demands of the buyers like lower price, more supply, etc.
• Barriers to new entrants - Generally, there are restrictions on other buyers to enter into the market. It can be govt. restrictions, license, high cost involved in initial investment and others which makes it difficult for other players to enter into the market.
An example in labour market (not in purest form), the IT industry in India (Companies like TCS and Infosys) employs huge no. of engineering graduates in IT sector. Since this industry has recruiters who hire in bulk and there are lakhs of engineering graduates coming out of college each year,they hire them at lower wages compared to international standards as those graduates doesn’t have much option. Similarly, in product market, amazon is huge buyer of books from different publisher. So it can negotiate with the publisher to cut down prices and lower the prices. The publishers are compelled to do that as they don’t have much alternatives.