Monopsony: examples and definition

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:45

In economics, there is a concept opposite to monopoly. In such a situation, there are a large number of sellers on the market and only one buyer. This is monopsony. There are plenty of examples of this phenomenon in everyday life. One of the most revealing is the labor market, where many workers are trying to sell their services and skills to a single enterprise. The cost of the final product in this case depends on the desire of the buyer.

Prerequisites for the emergence of the example of the labor market

Since monopsony is characterized by consumer preference, certain conditions must occur for it to occur. Directly on the labor market, there are the following prerequisites for the emergence of such a situation.

1. The company employs most of the specialists of a certain profession from the total.
2. In the labor market, there is an interaction between many qualified non-union employees and a large organization.
3. The company itselfsets wages, and its employees are forced to put up with it or look for another job.
4. A certain type of work activity is not highly mobile due to geographical isolation, social conditions or other difficulties.

Pronounced monopsony in the labor market is not uncommon. It is most typical for small towns, where there is only one large enterprise acting as an employer. In a competitive market, entrepreneurs have a wide choice of personnel, so labor mobility is absolute.

Monopoly comparison

The opposite phenomenon of monopsony is a monopoly, which is a market system in which economic activity is carried out by one seller with a large number of consumers. The company manufactures unique products that cannot be replaced. Consumers are forced to buy it or learn to do without it.

The same principles apply to monopsony. The state can also be an example. It often acts as the sole buyer for certain types of weapons. In both cases, it becomes possible to influence the formation of prices, which leads to gaining power over the market.

What is the limitation of a dictatorship?

Despite the opening opportunities, the power of monopsony cannot be absolute due to certain constraints in the economy. They are as follows.

1. Powerdirectly above the price of a product largely depends on its features and the flexibility of the offer.
2. The characteristics of the prevailing market situation, production process costs, margins and other factors should be taken into account in order to increase the economic effect.
3. The volume of production is chosen at which the difference between the real and paid price is the most optimal.
4. There is limited action due to potential cross-industry spillover. Suppliers with an unsatisfactory outcome in terms of profits may be retrained to produce other products.

Thus, we can conclude that monopsony is not absolute power over the market in the economy. There are certain factors that can influence the situation without the control of external structures.

Main species

There are many examples of monopsony, but they will have their own characteristics, so it is customary to subdivide situations into specific types. Each of these groups will have its own characteristics. The most common state monopsony, which is characterized by the purchase of products at stable prices.

It is also possible that the market situation arises as a result of competitive interactions. This is a commercial monopsony. She has an unstable character. For a number of reasons, it collapses very quickly. However, on the scale of a balanced market, such a phenomenon can lead to negative consequences, like a monopoly. Tofor example, artificial price reduction, economic coercion of counterparties to conclude unprofitable contracts can be carried out.

There are not so many examples of pure monopsony. This phenomenon is quite rare, like an absolute monopoly. This situation is possible in small towns or with the participation of the government. Some types of goods are simply prohibited for other consumers to purchase.

Monopsony price formation analysis

Before approaching the analysis of prices in the conditions of the presented situation, it is necessary to compare the markets of perfect and imperfect competition. In the first case, a large number of sellers and buyers participate in trade relations. None of them can affect the final cost of the goods.

On the graph, the demand curve with perfect competition for the manufacturer's products will become horizontal, and the supply line will rise. The invariance of the price for the buyer is an indicator that he does not influence it in any way, that is, the necessary conditions for equilibrium are clearly observed.

The situation changes with monopsony in the market. There is no need to give examples at the moment. Only one buyer acts as a participant in trade relations. In such a state of the market, the supply curve should take on a completely different shape. It will no longer be horizontal.

Illustrative examples of monopsony in Russia

The considered economic situation exists in the northern territories of the Russian Federation, where the cities of the closedtype. They worked directly for the defense. Monopsony is found in those places where city-forming enterprises were built. One of the most telling examples is the Ministry of Railways.

In Russia, state formations act as monopsony. The Ministry of Defense is the only buyer on the arms market. The same thing happens in rocket science. The Federal Space Agency is acquiring products without any competitors.

Causes of appearance and methods of elimination of the phenomenon in the Russian Federation

The reasons for the formation of monopsony in the territory of modern Russia were recently revealed. Price liberalization with the dominance of enterprises in the role of buyers in Russian markets in the regions leads to an abuse of the power established in the market. The situation is aggravated by administrative restrictions that prevent the normal operation of economic structures.

During special events, a methodology for analyzing regional markets was developed to timely identify abuses of power by business entities. It involves a detailed description of the trading platform and the definition of territorial limits.

The proposed methodology was tested on the example of agro-industrial markets. It can be used for practical research. The falsity of the macroeconomic approach to conducting a general analysis is also given.represented markets within the entire state. Consideration of trading floors in the regional context provided an opportunity to see the abuse of monopsony. The main problem is the relatively low level of local competition associated with the difficulties of transporting and storing manufactured products.

For the closing part

As for examples of monopsony in the world, the most illustrative of them was given earlier. The labor market on the whole planet is considered problematic. However, trade unions and other effective measures can save such a situation, so the power of the employer in many cases is not absolute. The modern buyer always takes into account economic feasibility, in connection with this, monopsony does not reach the level of outright dictatorship.