An oligopsony is a market form characterized by the presence of only a small number of buyers. These buyers have market power and can lower the price of a good or service because of a lack of competition. In other words, the seller loses its bargaining power because it is unable to find a buyer outside of the oligopsony that is willing to pay a better price.
Aspect
Explanation
Concept Overview
– Oligopsony is an economic term used to describe a market structure in which a small number of large buyers or purchasers exert significant influence over the purchasing of goods or services. This is the counterpart of oligopoly, where a small number of sellers dominate the market. In an oligopsonistic market, the buyers have the power to affect prices, quantities, and terms of trade, which can impact suppliers and the overall market dynamics.
Key Characteristics
– Few Large Buyers: Oligopsony markets are characterized by the presence of a limited number of major buyers or purchasers. These buyers are often dominant players in the industry. – Market Power: Oligopsonistic buyers have substantial market power and can influence prices and terms of trade. – Impact on Suppliers: Suppliers or sellers in an oligopsonistic market may have limited alternatives, making them vulnerable to the decisions and demands of the buyers. – Price Setting: Buyers may have the ability to set prices or negotiate terms that favor them, potentially leading to lower prices paid to suppliers. – Entry Barriers: High entry barriers can discourage new buyers from entering the market, which can further consolidate the power of existing buyers.
Examples
– Oligopsony can be found in various industries, such as agriculture, where a small number of large food processors or distributors dominate the purchase of crops from farmers. – It is also observed in the technology sector, where a few major companies may control the acquisition of components or technologies from suppliers. – In healthcare, a limited number of insurance companies or government agencies may serve as major buyers of medical services.
Effects on Suppliers
– Suppliers in an oligopsonistic market often face challenges: – They may have limited ability to negotiate prices and terms due to the buyer’s market power. – Suppliers may be forced to accept lower prices or unfavorable conditions. – Smaller suppliers may struggle to compete, potentially leading to consolidation within the supply chain. – Suppliers may seek alternative markets or buyers to reduce their dependence on the oligopsonistic buyer(s).
Regulation and Competition Policy
– Governments and regulatory bodies often monitor and regulate oligopsonistic markets to ensure fair competition and prevent abuses of market power. – Antitrust laws and competition policies aim to promote competition, prevent collusion among buyers, and protect the interests of suppliers and consumers. – Regulatory interventions can include measures to enhance transparency, promote fair pricing, and prevent anti-competitive behavior.
Mitigating Oligopsony Power
– Suppliers may employ various strategies to mitigate the power of oligopsonistic buyers: – Seek out alternative buyers or markets to diversify their customer base. – Collaborate with other suppliers to negotiate collectively or gain more bargaining power. – Advocate for regulatory interventions and government policies that promote fair competition. – Invest in cost efficiencies and differentiation to reduce vulnerability to price pressures.
Global Trade Implications
– Oligopsony can have implications for international trade when dominant buyers in one country impact global supply chains. – Suppliers in exporting countries may face challenges when dealing with powerful buyers in importing countries. – Trade negotiations and agreements can address issues related to market access, tariffs, and non-tariff barriers that affect suppliers in oligopsonistic markets.
Balancing Market Power
– Achieving a balanced distribution of market power between buyers and suppliers is essential for a healthy and competitive marketplace. – Effective competition policy and regulation can help create a level playing field and prevent the abuse of market power by dominant buyers. – A competitive and transparent market benefits both buyers and suppliers by fostering innovation, efficiency, and fair trade practices.
An oligopsony is a market for a product or service dominated by a few large buyers. The concentration of demand means each buyer has power over the seller to keep prices low.
An oligopsony is the opposite of an oligopoly, where the market is dominated by a few sellers that inflate prices in the absence of competition from other supply sources.
In addition to the presence of relatively few buyers, there are a few more traits that define an oligopsony:
It develops in a market of imperfect competition since buyers are the entities exercising market power. Imperfect competition is also associated with significant barriers to entry and prohibitive start-up costs.
Each buyer is connected. Thus, the policies of one buyer will have repercussions for the other buyers.
The presence of homogeneous products, or any product that cannot be distinguished from competing products from different suppliers. Most commodities including vegetables, fruits, oil, grains, and metals are homogeneous goods.
Buyers also ensure market costs provide them with a certain amount of profit that does provide an incentive for competition to enter the market.
Oligopsony examples
Here are a few examples of an oligopsony in a real-world scenario:
Fast-food
Perhaps the most cited example of an oligopsony is the fast-food industry. Restaurant chains such as McDonald’s, Burger King, and Wendy’s purchase most of the beef produced by cattle farmers. Such is their power that these buyers also influence animal welfare conditions and labor standards. In the United States alone, McDonald’s sells more than 1 billion pounds of beef each year.
Retail grocery
The retail grocery industry is now dominated by giant supermarket chains such as Walmart, Costco, Albertsons, and Kroger. Their influence extends back to dairy and produce farmers at the start of the supply chain, lowering farm-gate prices over time and making it more difficult for farmers to turn a profit.
Cocoa
A less obvious example of oligopsony is also present in the cocoa industry. Cocoa beans are grown all over the world, but there are only three primary buyers: Cargill, Archer Daniels Midland (ADM), and Barry Callebaut. Most cocoa is sourced from poor farmers in third-world nations with already low bargaining power.
Aircraft components
For companies that manufacture aircraft components, their choice of buyers is also limited. Boeing, Airbus, and Embraer dominate commercial aircraft assembly, while Boeing and Airbus together with Lockheed and GE dominate aerospace and defense aircraft assembly.
Cinema
There are also few buyers of the specialized screen and projector technology found in modern cinemas. In North America, the cinema industry is dominated by five chains: AMC Entertainment, Regal Cinemas, Cineplex Entertainment, Marcus Theatres Corp., and Cinemark. Collectively, these chains operate 22,390 cinema screens across the United States and Canada and enjoy market dominance.
Key takeaways:
An oligopsony is a market for a product or service dominated by a few large buyers. The concentration of demand means each buyer has the power to put downward pressure on prices.
An oligopsony develops in markets characterized by imperfect competition, connected buyers, homogeneous products, and profit margins that do not attract new entrants.
The fast-food industry is one notable example of an oligopsony. However, the effect is also present in retail grocery, cocoa farming, aircraft component manufacturing, and cinema technology.
Key Highlights
Definition and Characteristics:
An oligopsony is a market structure characterized by a small number of dominant buyers who possess market power.
These buyers can exert pressure on sellers to lower the prices of goods or services due to the lack of competition.
An oligopsony is the opposite of an oligopoly, where a few sellers dominate the market and can raise prices due to limited competition.
Key Traits of Oligopsony:
Develops in markets with imperfect competition where buyers hold market power.
Involves significant barriers to entry and prohibitive startup costs, preventing new players from entering.
Buyers are interconnected, and decisions made by one buyer can impact others.
Involves homogeneous products, which are goods that are indistinguishable from those of other suppliers.
Buyers ensure market costs allow for profit, encouraging competition to enter the market.
Examples of Oligopsony:
Fast-Food Industry:
Fast-food chains like McDonald’s, Burger King, and Wendy’s dominate the beef market, influencing pricing, labor standards, and animal welfare conditions.
Retail Grocery:
Giant supermarket chains like Walmart, Costco, and Kroger exert influence from farm-gate to retail, impacting farm profitability.
Cocoa Industry:
Three primary buyers, Cargill, ADM, and Barry Callebaut, dominate the cocoa industry, affecting farmers in third-world nations.
Aircraft Components Manufacturing:
Aircraft component manufacturers have limited buyers like Boeing, Airbus, Lockheed, and GE, impacting market dynamics.
Cinema Technology:
The cinema industry, dominated by chains like AMC Entertainment and Regal Cinemas, affects the specialized technology market.
Impact and Power:
Oligopsonies have the power to influence pricing, standards, and conditions throughout supply chains.
Dominant buyers can lower prices for suppliers and impact profitability, especially for smaller producers.
The interconnectedness of buyers and limited options for sellers create a market structure where buyers hold significant influence.
Key Takeaways:
Oligopsony involves a few dominant buyers in a market who can drive down prices due to a lack of competition.
Characteristics include imperfect competition, connected buyers, homogeneous products, and constrained profit margins.
Examples range from the fast-food and retail grocery industries to cocoa farming, aircraft components, and cinema technology.
Related Frameworks, Models, or Concepts
Description
When to Apply
Monopsony
Monopsony is a market structure characterized by a single buyer dominating the market for a particular product or service. In a monopsony, the monopsonist has significant market power to dictate terms to suppliers, including prices and quantities purchased. Monopsonies may arise due to barriers to entry, consolidation of buyers, or control over essential resources. By studying monopsonies, economists can analyze the implications for market efficiency, supplier welfare, and the need for regulation.
Consider Monopsony when analyzing industries dominated by a single buyer. Use it to understand the implications of buyer power, price setting, and potential inefficiencies. Implement Monopsony as a framework for assessing the need for antitrust regulation, market interventions, and supplier protection policies.
Perfect Competition
Perfect Competition is a theoretical market structure characterized by a large number of buyers and sellers, homogeneous products, perfect information, and ease of entry and exit. In perfect competition, no single buyer or seller has the power to influence market prices, and buyers and sellers are price takers. By studying perfect competition, economists can understand the theoretical benchmark for market efficiency and resource allocation.
Consider Perfect Competition when analyzing market structures and competitive dynamics. Use it to understand the conditions necessary for perfect competition and the implications for market outcomes, efficiency, and welfare. Implement Perfect Competition as a benchmark for evaluating real-world market structures and regulatory policies.
Oligopoly
Oligopoly is a market structure characterized by a small number of large buyers dominating the market. In an oligopoly, buyers may have significant market power to influence prices, terms, and conditions of sale. Oligopolistic industries often exhibit interdependence among buyers, with actions by one buyer affecting others. By studying oligopolies, economists can analyze the behavior of buyers in concentrated markets and the implications for competition and market outcomes.
Consider Oligopoly when analyzing industries dominated by a few large buyers. Use it to understand strategic interactions among buyers, including bargaining power, price negotiations, and competitive dynamics. Implement Oligopoly as a framework for assessing market power, antitrust concerns, and regulatory policies in concentrated buyer markets.
Market Power
Market Power refers to the ability of buyers to influence market outcomes, including prices, quantities, and terms of trade. Buyers with market power can exert control over suppliers, demand concessions, and dictate market conditions. Understanding market power is essential for assessing competitive dynamics, market efficiency, and welfare implications.
Consider Market Power when analyzing buyer-seller relationships and competitive dynamics in markets. Use it to assess the ability of buyers to influence prices, quantities, and terms of trade. Implement Market Power as a framework for evaluating market competitiveness, antitrust concerns, and regulatory interventions.
Price Discrimination
Price Discrimination is a strategy used by buyers to charge different prices to different suppliers for the same product or service. Price discrimination allows buyers to capture surplus value and increase their profits by exploiting differences in suppliers’ willingness to sell. By practicing price discrimination, buyers can enhance their bargaining power and extract maximum value from suppliers.
Consider Price Discrimination when analyzing buyer strategies to maximize surplus value and profits. Use it to understand how buyers differentiate prices based on suppliers’ characteristics, bargaining power, and market conditions. Implement Price Discrimination as a strategy for buyers to increase their bargaining power, capture surplus value, and achieve favorable terms from suppliers.
Supply Chain Management
Supply Chain Management involves the coordination and integration of activities across the supply chain, from sourcing raw materials to delivering finished products to customers. In oligopsonistic markets, buyers play a crucial role in managing supply chains, selecting suppliers, and optimizing procurement processes. Effective supply chain management can enhance efficiency, reduce costs, and improve supplier relationships in concentrated buyer markets.
Consider Supply Chain Management when analyzing procurement processes and buyer-supplier relationships in oligopsonistic markets. Use it to optimize supply chain activities, mitigate supply chain risks, and improve collaboration with suppliers. Implement Supply Chain Management as a strategy for buyers to enhance efficiency, reduce costs, and achieve competitive advantages in concentrated buyer markets.
Bargaining Power
Bargaining Power refers to the ability of buyers and sellers to negotiate favorable terms and conditions in transactions. Buyers with stronger bargaining power can demand lower prices, higher quality, or better terms from suppliers. Understanding bargaining power dynamics is essential for assessing market competitiveness, distribution of surplus value, and welfare implications.
Consider Bargaining Power when analyzing buyer-supplier relationships and negotiating strategies in markets. Use it to assess the relative strength of buyers in transactions and the implications for market outcomes. Implement Bargaining Power as a framework for evaluating market competitiveness, pricing strategies, and supplier relationships in oligopsonistic markets.
Elasticity of Supply
Elasticity of Supply measures the responsiveness of quantity supplied to changes in price. It helps determine how sensitive suppliers are to price changes and how changes in price affect total supply. In oligopsonistic markets, understanding supply elasticity is crucial for predicting supplier responses to changes in buyer demand or prices.
Consider Elasticity of Supply when analyzing supplier behavior and market dynamics in oligopsonistic markets. Use it to assess how changes in price affect the quantity supplied by suppliers and the implications for market equilibrium. Implement Elasticity of Supply as a tool for buyers to anticipate supplier responses, optimize procurement decisions, and mitigate supply chain risks effectively.
Market Concentration
Market Concentration measures the degree to which a small number of buyers dominate the market. High market concentration indicates oligopsonistic market structures, where a few buyers control a significant share of market demand. Understanding market concentration is essential for assessing buyer power, competition levels, and market dynamics in concentrated buyer markets.
Consider Market Concentration when analyzing buyer-seller relationships and competitive dynamics in markets. Use it to assess the degree of buyer dominance and its implications for market competitiveness, pricing behavior, and supplier welfare. Implement Market Concentration as a framework for evaluating antitrust concerns, regulatory policies, and market interventions in oligopsonistic markets.
Regulatory Policies
Regulatory Policies aim to promote fair competition, protect consumer interests, and ensure market efficiency in oligopsonistic markets. Regulatory policies may include antitrust laws, competition regulations, and procurement guidelines to prevent anti-competitive behavior, promote transparency, and safeguard supplier welfare. Understanding regulatory policies is crucial for buyers and suppliers operating in concentrated buyer markets to comply with legal requirements and maintain ethical business practices.
Consider Regulatory Policies when operating in oligopsonistic markets subject to regulatory oversight. Use it to understand legal requirements, compliance obligations, and ethical standards governing buyer-supplier relationships. Implement Regulatory Policies as guidelines for buyers and suppliers to promote fair competition, transparency, and market efficiency in concentrated buyer markets.
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Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
