Definition of Oligopsony
An oligopsony is a market condition where a few large buyers dominate and control the market for purchasing a product or service from numerous small sellers. This market structure leads to significant influence over prices and terms of purchase by the buyers. Unlike a monopoly, which is characterized by a single seller, an oligopsony features a limited number of buyers. This can lead to reduced prices for sellers and an imbalance in negotiating power.
Examples of Oligopsony
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Tobacco Industry: In several countries, the tobacco industry is dominated by a handful of major companies. These large corporations purchase tobacco from numerous small farmers, giving the corporations significant control over the price and other purchasing terms.
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Supermarkets and Agricultural Produce: Major supermarket chains often create an oligopsony in the agricultural sector, where a few supermarkets dominate the purchasing of fruits and vegetables, impacting the prices paid to farmers.
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Defense Sector: The defense and aerospace industries often feature a few major government contractors purchasing from numerous smaller manufacturers and suppliers of parts and technologies.
Frequently Asked Questions (FAQs)
Q1: What is the impact of an oligopsony on small sellers?
A1: Small sellers in an oligopsony may face lower prices for their products and less bargaining power. They may be compelled to accept unfair terms due to the significant power that the few large buyers hold.
Q2: Can an oligopsony lead to market inefficiencies?
A2: Yes, an oligopsony can lead to market inefficiencies such as reduced innovation and production. The controlled purchasing power may discourage sellers from improving products or processes due to limited financial returns.
Q3: How does oligopsony differ from oligopoly?
A3: Oligopsony refers to a market with few buyers and many sellers, exerting control over purchasing. An oligopoly, on the other hand, refers to a market with few sellers and many buyers, where the sellers control pricing and market conditions.
Q4: Are there regulatory measures to prevent the negative effects of an oligopsony?
A4: Yes, governments can enforce antitrust laws and regulations to ensure fair competition and prevent the abuse of market power by large buyers in an oligopsony.
Q5: Does oligopsony exist in labor markets?
A5: Yes, oligopsony can exist in labor markets where a few employers dominate the hiring of a specific workforce, leading to lower wages and limited job opportunities for workers.
Related Terms
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Monopoly: A market structure with only one seller controlling the supply of a product or service.
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Oligopoly: A market structure with a few sellers that have significant control over market conditions and prices.
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Monopsony: A market structure with only one buyer exerting control over the purchase of a product or service.
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Cartel: A group of independent businesses or entities that collude to manipulate the market for their mutual benefit, such as setting prices or limiting production.
Online References
Suggested Books for Further Studies
- “Industrial Organization: Contemporary Theory and Empirical Applications” by Lynne Pepall, Dan Richards, and George Norman
- “Microeconomics: Theory and Applications” by Edwin Mansfield and Gary Yohe
- “Economics of Imperfect Competition and Employment: Joan Robinson and Beyond” by George R. Feiwel
Fundamentals of Oligopsony: Economic Concepts Basics Quiz
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