Graph of Monopsony from Wikipedia
Word Smith: Monopsony
A monopsony, sometimes referred to as a buyer’s monopoly, is a market condition similar to a monopoly. However, in a monopsony, a large buyer, not a seller, controls a large proportion of the market and drives prices down, because the company has the economies of scale to do so. A monopsony occurs when a single firm has market power through its power of production. The firm is the sole purchaser for multiple sellers and drives down the price of the seller’s products or services according to the amount of quantity that it demands.
Some examples of Monopsony in today’s marketplace include Apple, Amazon, Google, Samsung, LG, Walmart and Facebook. Each of these companies has the power to control portions of the market and stress them by having continuously low prices. Others, sooner than the incumbent company, lose the ability to compete.
Monopsony can impact workers also. It can also occur when there are many providers of a product (including labor) but only one dominant buyer, who controls employees and can drive prices down. In the labor market context, it means workers have lost the bargaining power they need to push for higher pay. Monopsony power was a feature of the company towns that helped define the Industrial Revolution, since everybody served one employer. More recently, the concentration of many industries into fewer and fewer dominant players, combined with the decline of labor unions, may have tilted negotiating ability away from workers and toward corporations.
Wages are the primary reason the country is worried about monopsony. Wages for the average worker have stagnated or have been growing relatively slowly, since the economy recovered from the 2007-2009 downturn. That disconnect between employment and wages is surprising, because unemployment is now very low, while employer complaints about worker shortages are reaching a fever pitch. If there are genuinely not enough workers to go around, and employees still can’t negotiate much-higher pay (as available data suggests), competition isn’t playing out as it’s supposed to. That’s why monopsony is getting a hard look by government officials.
Think of Amazon!
As big-box retail crushed mom-and-pop stores in the 1990’s, some communities were left with one dominant retail employer, in many cases outlets of a chain like Walmart. But now, some economists are exploring a broader definition of the term, saying that employers have wage-setting power not just because they dominate a market but because it’s tough for workers to change jobs. If some cocktail of imperfect information about available opportunities and outright barriers to changing jobs (like licensing) are making it harder to find and get new gigs, workers could be settling for less pay than they would otherwise be capable of earning.
There is some anecdotal evidence of employer domination, including the abuse of non-compete agreements which bar workers from taking a job from a rival company. Originally designed to prevent key employees from walking away with proprietary information, even fast food chains have tried to restrict the movement of low-wage workers in this way. Lawsuits have alleged that tech giants including Apple, Google, Samsung and LG have conspired to hold down wages by agreeing not to recruit and hire each others’ employees.
As with monopolies, monopsonies can be deemed illegal. The U.S. Federal Trade Commission’s Bureau of Competition and the Justice Department’s antitrust division can challenge a monopsony that either office deems to be anti-competitive. Some economists are also urging the FTC also to consider potential monopsony effects when reviewing proposed mergers and acquisitions.