Monopsony: A buyer's monopoly.

A monopsony is a situation where there are a number of sellers but only one buyer for a particular good or service. Compare with a monopoly where there are many buyers but only one seller. In a monopsony the single buyer has control; rather than the single seller in a monopoly, so prices are forced down not up.

Monopsonies are rarer than monopolies. Whereas monopolies can and do occur in mass-markets, e.g. for petroleum products or computer software, monopsonies are most common in niche and closed markets. Let’s look at some examples.

  • arms procurement: A rich government such as the US or EU will tender, e.g. for a new model fighter jet to be developed to meet a certain specification. Several companies will bid competing designs. One of them will get the contract, and the rest will walk away empty-handed.
  • Government utilities as a customer. When there is only one company in a country in a nationalised industry, any company providing goods, services or software in that industry has only one customer. Examples are government utilities such as water, electricity, railways, road construction, etc. If you make large road-construction equipment, you generally have only one potential customer per country.
  • Regulated industries with a controlled price. In some countries, for instance, the maize board would buy all maize from farmers at a set price.
  • Bespoke software development. Shrink-wrapped, packaged software forms a small part of the overall software industry. Most software development is business applications built on request for a single customer. Often, several software development houses will bid for the contract, and the cheapest/most believable proposal will be accepted.
  • The De Beers diamond cartel is a middleman that buys rough diamonds from mines and sells them as cut stones, and has managed to cut everyone else out of this role. They are both a monopsony and a monopoly (and thus doubly evil).
  • Big supermarkets have huge power over what many small fresh produce farmers grow and how they grow it, though this is more of an oligopsony as in most countries the farmer can deal with more than one supermarket chain.
  • Oddly enough, there are Monopsonies in sport. Or rather, in the business of sport as mass entertainment. There tends to be only one Football Association or NBA per country, and teams must compete for a limited number of games and attendant lucrative public exposure.

A monopsony where the client chooses one vendor from among several (i.e. all except the maize board example), can change vendors with little friction (i.e. not the bespoke software example or fighter jet development) is a situation that the client enjoys a lot, and the vendors don't enjoy much, as the buyer has all the bargaining power.

As an example of something that is a fairly standard product, but is but useless outside a vertical market, consider tarmac; if you want to sell asphalt to the road-building authority, and so do ten other companies, ongoing competition on price is going to be fierce.

In cases where a lucrative contract will be awarded, there may be attempts to influence the official with the purchasing decision. Arms procurement is notorious for this.

Sources: Experience, web. Thanks to Wikipedia for the road construction example. Thanks to a meeting at work for the idea of doing this writeup, and the characterisation of Network rail UK as a monopsony.

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