Legal Definitions - monopsony

A monopsony describes a market condition where there is only one dominant buyer for a particular good, service, or labor. This single buyer has significant power to influence the price and quantity of what they purchase because sellers have few, if any, alternative customers. Essentially, it's the opposite of a monopoly, where one seller dominates.

In a monopsony, the powerful buyer can dictate terms, often leading to sellers receiving lower prices than they would in a competitive market. This can reduce the overall supply of that good, service, or labor, as producers or workers may be less incentivized to offer it at the lower, buyer-controlled prices.

Here are some examples to illustrate a monopsony:

• Isolated Labor Market: Imagine a remote town where a single large factory is the only significant employer. For most residents, this factory is the only realistic option for employment without relocating. In this scenario, the factory acts as a monopsony for labor. It can offer lower wages or fewer benefits than it might in a more competitive job market because workers have very limited alternative employers to turn to, giving the factory substantial power over the terms of employment.

• Specialized Agricultural Processing: Consider a region where farmers grow a unique type of fruit, but there is only one processing plant equipped to buy and prepare that specific fruit for market. This processing plant holds a monopsony position. The farmers, despite their collective output, must sell their perishable crop to this single buyer. The plant can therefore dictate the purchase price, knowing that the farmers have no other local outlets for their specialized produce, potentially forcing them to accept prices below what a competitive market would offer.

• Government as Sole Purchaser: A national government often acts as a monopsony when purchasing highly specialized military equipment, such as custom-designed stealth bombers or advanced missile defense systems. While there might be a few defense contractors capable of producing such items, the government is typically the only customer for these unique, high-cost products. This allows the government to exert considerable influence over the price, specifications, and delivery terms, as the contractors have no other market for these specific goods.