Effect of Buyers on Competition

Generally speaking, if there are only a few buyers in a given market, there will be less competition than if there are many buyers. Monopsony exists when a single firm is the sole buyer of a desired product or input. Monopsony characterizes local labor markets with a single major employer, as well as many local agricultural markets with a single feed mill or livestock buyer. Similarly, the federal government is a monopsony buyer of military weapons and equipment. Major retailers such as Wal-Mart, Target, and Sears all enjoy monopsony power in the purchase of apparel, appliances, auto parts, and other consumer products. Such buyer power is especially strong in the purchase of "house brand" goods, where suppliers sell much if not all of their production to a single retailer. Monopsony is more common in factor input markets than in markets for final demand.

In terms of economic efficiency, monopsony is least harmful, and can sometimes even be beneficial, in those markets in which a monopsony buyer faces a monopoly seller. For example, consider the case of the town in which one mill is the sole employer of unskilled labor. The mill is a monopsony because it is a single buyer of labor, and it may be able to use its power to reduce wage rates below competitive levels. If workers organize a union to bargain collectively with their employer, a single monopoly seller of labor is created that could offset the employer's monopsony power and increase wages toward competitive market norms. Not only is monopsony accepted in such situations, but it is sometimes encouraged by public policy.

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