Monopsony

A Monopsony is a situation where there is only one buyer in a market. The conditions for a monopsony are the same as those for a monopoly however they apply for the buyer not the seller. It is assumed that monopsonists aim to maximise their profits by minimising their costs; this can be achieved by paying their suppliers the lowest possible price. It is assumed that sellers can’t sell their product to anyone else (as there is nobody else in the market!).

The monopsonists benefits from higher profits by being able to buy at lower prices, and thus having lower costs of production. This is also likely to lead to an increase in overall output due to the downward shift of its marginal cost curve. Suppliers are likely to lose out in a monopsony situation as they will receive lower prices for their goods/services. Hence suppliers will supply less (there will be a leftward shift of supply) which will lead some firms or people to leave the market. Customers are likely to see lower prices as the monopsonists passes on some of the lower costs. However they may receive less supply, or less choice.

If there is only one buyer (a monopsonists) and one seller (a monopoly) then a bilateral monopoly situation arises. It is believed that this will result in a higher price than if a monopsonists had many suppliers, this will lead to greater allocative efficiency in the market.