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.
Understanding an oligopsony
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.
Here are a few examples of an oligopsony in a real-world scenario:
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.
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.
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.
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.
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.
- 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.
Connected Economic Concepts
Positive and Normative Economics
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