What is Monopsony

What is Monopsony

Monopsony is a market in which a single buyer completely controls the demand for a good. While the market for any type of good, service, resource, or commodity could, in principle, function as monopsony, this form of market structure tends to be most pronounced for the exchange of factor services.
While the real world does not contain monopsony in its absolute purest form, labor markets in which a single large factory is the dominate employer in a small community comes as close as any.

Monopsony

Like a monopoly seller, a monopsony buyer is a price maker with complete market control. Monopsony is also comparable to monopoly in terms of inefficiency. Monopsony does not generate an efficient allocation of resources. The price paid by a monopsony is lower and the quantity exchanged is less than with the benchmark of perfect competition.

Characteristics of Monopsony

The three key characteristics of monopsony are:
(1) a single firm buying all output in a market,
(2) no alternative buyers, and
(3) restrictions on entry into the industry.

Monopsony Single Buyer: 

First and foremost, a monopsony is a monopsony because it is the only buyer in the market. The word monopsony actually translates as "one buyer." As the only buyer, a monopsony controls the demand-side of the market completely. If anyone wants to sell the good, they must sell to the monopoly.

Monopsony No Alternatives: 

A monopsony achieves single-buyer status because sellers have no alternative buyers for their goods. This is the key characteristics that usually prevents monopsony from existing in the real world in its pure, ideal form. Sellers almost always have alternatives.

Monopsony Barriers to Entry: 

A monopsony often acquires and generally maintains single buyer status due to restrictions on the entry of other buyers into the market. The key barriers to entry are much the same as those that exist for monopoly: (1) government license or franchise,
(2) resource ownership,
(3) patents and copyrights,
(4) high start-up cost, and
(5) decreasing average total cost.