Oligopsony

Posted in Finance, Accounting and Economics Terms, Total Reads: 147
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Definition: Oligopsony

Oligopsony is a market scenario in which total buyers are less as compared to total sellers i.e. firms dominate the market for selling goods and services. The situation of Oligopsony arises when there are numerous suppliers competing against each other to sell their product to a very small number of buyers. Buyers then take the advantage of exerting a great deal of control over the sellers. Oligopsony is perfect example of imperfect competition.


Importance of Oligopsony

Oligopsony is when more people are selling goods or products, and the total people buying these goods are lesser. Buyers are mainly interested in increasing profits and gaining competitive advantage over other buyers. As a result of which they drive down the prices. Buyers have a very big advantage over the sellers, used to play off one supplier against other, and also dictate exact specifications, quality, and variety to the suppliers.

Oligopsony


Advantages of Oligopsony

Certain advantages of Oligopsony in the market are:

1. Advantageous to buyers as they gain control and power over multiple sellers.

2. Oligopsony helps buyers in dictating prices, variety and quality.

3. Being an imperfect competition, buyers control the market through entry barriers which includes patents, ownership, brand name recognition which makes it very difficult for the potential customers to enter the market.


Disadvantages of Oligopsony

On the other hand, some disadvantages of Oligopsony are:

1. Oligopsony creates problems for sellers as they have to compromise their prices in order to get their product sold which in turn put them at a considerable loss.

2. Sellers get few alternative buyers for their goods and while alternatives exist, they are less desirable.


Difference between Oligopsony & Oligopoly

Oligopsony concept contrasts with oligopoly the number of buyers are more that sellers. Here, the suppliers dominate the market and have considerable control over the product’s price. There exists an intense competition between the sellers unlike Oligopsony where competition exists between buyers. Example of Oligopoly – Operating Systems (OS) for smartphones and computer. In this space, Android and Apple iOS dominates the smartphone OS whereas computer OS are being overshadowed by Windows and Apple.


Similarity between Oligopsony with Monopsony

Oligopsony is very much similar to monopsony in which there is only one buyer for a product unlike oligopsony where few numbers of buyers exert control over the price of the product. In this case, sellers often involved in price wars to attract single buyer by driving down the price and increasing the quantity. Those suppliers who get caught in monopsony are known to race to the bottom by losing control and power which they had previously over the supply. Example of Monopsony – Technology Industry where sellers (potential employees) compete on wages for fewer jobs available which in turn leads to reduction of employee cost for the business.


Examples of Oligopsony

Some real life examples of Oligopsony are:

1. Big supermarkets in dealing with farmers – In this example, there exist a contract between supermarket and farmer that supermarket will buy all their produce. The farmer then sets up supply to meet their demands. But Supermarkets started paying them very less and the farmer was not even in a position to sell anywhere else according to the contract which results in accepting lower price from supermarkets.

2. US fast food Industry –There were very few large buyers like Burger King, McDonald’s as compared to the sellers (in this case farmers) who dominate the market who pay very less price to farmers for meat.

Hence, this concludes the definition of Oligopsony along with its overview.

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