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.
Table of Contents
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.
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.
The idea of a market economy first came from classical economists, including David Ricardo, Jean-Baptiste Say, and Adam Smith. All three of these economists were advocates for a free market. They argued that the “invisible hand” of market incentives and profit motives were more efficient in guiding economic decisions to prosperity than strict government planning.
Positive economics is concerned with describing and explaining economic phenomena; it is based on facts and empirical evidence. Normative economics, on the other hand, is concerned with making judgments about what “should be” done. It contains value judgments and recommendations about how the economy should be.
When there is an increased price of goods and services over a long period, it is called inflation. In these times, currency shows less potential to buy products and services. Thus, general prices of goods and services increase. Consequently, decreases in the purchasing power of currency is called inflation.
Asymmetric information as a concept has probably existed for thousands of years, but it became mainstream in 2001 after Michael Spence, George Akerlof, and Joseph Stiglitz won the Nobel Prize in Economics for their work on information asymmetry in capital markets. Asymmetric information, otherwise known as information asymmetry, occurs when one party in a business transaction has access to more information than the other party.
Autarky comes from the Greek words autos (self)and arkein (to suffice) and in essence, describes a general state of self-sufficiency. However, the term is most commonly used to describe the economic system of a nation that can operate without support from the economic systems of other nations. Autarky, therefore, is an economic system characterized by self-sufficiency and limited trade with international partners.
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 seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.
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.
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 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.
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.
The paradox of thrift was popularised by British economist John Maynard Keynes and is a central component of Keynesian economics. Proponents of Keynesian economics believe the proper response to a recession is more spending, more risk-taking, and less saving. They also believe that spending, otherwise known as consumption, drives economic growth. The paradox of thrift, therefore, is an economic theory arguing that personal savings are a net drag on the economy during a recession.
In simplistic terms, the circular flow model describes the mutually beneficial exchange of money between the two most vital parts of an economy: households, firms and how money moves between them. The circular flow model describes money as it moves through various aspects of society in a cyclical process.
Trade deficits occur when a country’s imports outweigh its exports over a specific period. Experts also refer to this as a negative balance of trade. Most of the time, trade balances are calculated based on a variety of different categories.
A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.
Rational choice theory states that an individual uses rational calculations to make rational choices that are most in line with their personal preferences. Rational choice theory refers to a set of guidelines that explain economic and social behavior. The theory has two underlying assumptions, which are completeness (individuals have access to a set of alternatives among they can equally choose) and transitivity.
The peer-to-peer (P2P) economy is one where buyers and sellers interact directly without the need for an intermediary third party or other business. The peer-to-peer economy is a business model where two individuals buy and sell products and services directly. In a peer-to-peer company, the seller has the ability to create the product or offer the service themselves.
The term “knowledge economy” was first coined in the 1960s by Peter Drucker. The management consultant used the term to describe a shift from traditional economies, where there was a reliance on unskilled labor and primary production, to economies reliant on service industries and jobs requiring more thinking and data analysis. The knowledge economy is a system of consumption and production based on knowledge-intensive activities that contribute to scientific and technical innovation.
In a command economy, the government controls the economy through various commands, laws, and national goals which are used to coordinate complex social and economic systems. In other words, a social or political hierarchy determines what is produced, how it is produced, and how it is distributed. Therefore, the command economy is one in which the government controls all major aspects of the economy and economic production.
How do you protect your rights as a worker? Who is there to help defend you against unfair and unjust work conditions? Both of these questions have an answer, and it’s a solution that many are familiar with. The answer is a labor union. From construction to teaching, there are labor unions out there for just about any field of work.
The bottom of the pyramid is a term describing the largest and poorest global socio-economic group. Franklin D. Roosevelt first used the bottom of the pyramid (BOP) in a 1932 public address during the Great Depression. Roosevelt noted that – when talking about the ‘forgotten man:’ “these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power.. that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”
Glocalization is a portmanteau of the words “globalization” and “localization.” It is a concept that describes a globally developed and distributed product or service that is also adjusted to be suitable for sale in the local market. With the rise of the digital economy, brands now can go global by building a local footprint.
Market fragmentation is most commonly seen in growing markets, which fragment and break away from the parent market to become self-sustaining markets with different products and services. Market fragmentation is a concept suggesting that all markets are diverse and fragment into distinct customer groups over time.
The L-shaped recovery refers to an economy that declines steeply and then flatlines with weak or no growth. On a graph plotting GDP against time, this precipitous fall combined with a long period of stagnation looks like the letter “L”. The L-shaped recovery is sometimes called an L-shaped recession because the economy does not return to trend line growth. The L-shaped recovery, therefore, is a recession shape used by economists to describe different types of recessions and their subsequent recoveries. In an L-shaped recovery, the economy is characterized by a severe recession with high unemployment and near-zero economic growth.
Comparative advantage was first described by political economist David Ricardo in his book Principles of Political Economy and Taxation. Ricardo used his theory to argue against Great Britain’s protectionist laws which restricted the import of wheat from 1815 to 1846. Comparative advantage occurs when a country can produce a good or service for a lower opportunity cost than another country.
The Easterlin paradox was first described by then professor of economics at the University of Pennsylvania Richard Easterlin. In the 1970s, Easterlin found that despite the American economy experiencing growth over the previous few decades, the average level of happiness seen in American citizens remained the same. He called this the Easterlin paradox, where income and happiness correlate with each other until a certain point is reached after at least ten years or so. After this point, income and happiness levels are not significantly related. The Easterlin paradox states that happiness is positively correlated with income, but only to a certain extent.
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 organizationscale further.
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.
An economy of scope means that the production of one good reduces the cost of producing some other related good. This means the unit cost to produce a product will decline as the variety of manufactured products increases. Importantly, the manufactured products must be related in some way.
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.
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.
