What is a monopsony?

A monopsony refers to a market structure characterized by the presence of a single buyer that exerts considerable control over the market, particularly influencing the demand for goods or services and the prices paid to suppliers. In this scenario, the single buyer typically has significant power in negotiating terms and can dictate prices due to the lack of competition among buyers.

This market dynamic can lead to lower prices for suppliers and can affect the overall supply chain, as producers or service providers have no alternative buyers for their products. As a result, the interplay of supply and demand in a monopsony often leads to unique outcomes in pricing and market efficiency.

Understanding the concept of a monopsony is crucial for analyzing market behaviors, especially in industries where one large buyer may dominate purchasing power, such as in agriculture (where a large grocery chain may buy products from numerous farmers) or public services (where a government may be the primary purchaser of healthcare services).