Question

What is a monopsony?

Short answer

A monopsony is a market situation where there is only one buyer, giving this buyer significant power to influence market price, quantity, and terms of exchange. An example of a monopsony is a single employer in a remote area, like a mining company, which has significant power over the local labor market due to limited alternative employment options.

Step-by-step solution

Define Monopsony

A monopsony is a market situation in which there is only one buyer, and this single buyer has significant power over the suppliers. By having this power, the monopsonist can control the market price, the quantity of goods or services provided, and the terms of exchange. Monopsonies commonly occur in labor markets but can also appear in other markets such as raw materials or agricultural products.

Explain Monopsony's Market Power

The monopsonist has significant market power because they are the sole purchaser of a particular good or service. Suppliers have no choice but to sell to the monopsonist, even if they are not satisfied with the price or terms offered. As a result, the monopsonist can push down the price of the supplies, thus lowering production costs for themselves and potentially creating barriers to entry for new competitors.

Provide an Example of Monopsony

One example of a monopsony is a single employer in a town or region, such as a mining company operating in a remote area. Since the mining company is the only major employer in the region, it has significant power over the local labor market. The mining company can potentially pay workers less than they would receive in a more competitive market, as the workers have limited alternative employment options. This situation illustrates the power dynamics that can arise in a monopsony market.