oligopsony

What Is An Oligopsony? Oligopsony In A Nutshell

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.

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.

Main Free Guides:

Connected Business Concepts

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In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

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In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Network Effects

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In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Negative Network Effects

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In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Creative Destruction

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Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.

Happiness Economics

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Command Economy

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The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage.  Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.

State Capitalism

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State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.

Boom And Bust Cycle

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The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.
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