Oligopsony

Updated on May 2, 2024
Article byKhalid Ahmed
Reviewed byDheeraj Vaidya, CFA, FRM

Oligopsony Definition 

Oligopsony is a market structure consisting of a large number of sellers but a few buyers. Sellers have little negotiation power and compete to sell their goods and services to a handful of buyers. It gives the latter more control over the price of the former’s products.

Oligopsony Definition

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Oligopsony is a type of imperfect marketImperfect MarketImperfect market structure is a part of microeconomics in which companies sell different products and services, as opposed to perfect competitive markets in which homogeneous products are sold. Companies in this sector have some pricing power with high barriers to entry, resulting in higher profit margins as each company tries to differentiate their products and services through innovative technology.read more. Buyers, usually big and powerful, dictate the terms and prices to the sellers and make huge profits by ensuring the prices remain low. At the same time, sellers keep their prices down to stay competitive. Input markets with a huge number of suppliers and a few dominant buyers are a common form of an oligopsony. It is the opposite of an oligopoly Oligopoly An oligopoly in economics refers to a market structure comprising multiple big companies that dominate a particular sector through restrictive trade practices, such as collusion and market sharing. Oligopolists seek to maximize market profits while minimizing market competition through non-price competition and product differentiation. read morewhere there are a few influential sellers and a large number of buyers.

Key Takeaways

  • Oligopsony is a market structure where the number of buyers is small, whereas the number of sellers is large.
  • The concentration of demand in the hands of a few buyers allows them to influence the price of commodities sold by numerous sellers.
  • This system of few buyers and multiple sellers tilts the balance of profit and benefits in favor of buyers.
  • It contrasts with oligopoly, where there are few sellers and many buyers.
  • This imperfect market structure is typically seen in industries like publication, dairy, food, agriculture, etc.

Oligopsony Explained

Oligopsony is a market system where there are many sellers of a product or service and only a few eminent buyers. In Greek, the term ‘oligo’ means few and ‘opsonia’ means to purchase. So, in this system, only a few purchasers exist. These few powerful buyers control the market through their reach and scale.

In the absence of multiple buyers, sellers are forced to compete with each other and sell their products at a price desired by these buyers. Thus, a competitive imbalance exists in the market, making oligopsony a form of imperfect competition.

In this system, buyers are in an advantageous position instead of sellers. They have the luxury of manipulating sellers to obtain goods at low prices and earn surplus profits. Besides prices, buyers also influence:

  • Quality of products
  • Specifications of goods and services
  • Product varieties
  • Quantity of products
  • Delivery schedule of products
  • Payment mode and schedule

Therefore, the buyers gain in this type of market, whereas sellers are left at the mercy of the buyers.

Oligopsony exists in industries or sectors like publication, dairy, food, agriculture, etc. A few big companies use their clout over the market to control the price they pay to the sellers like coffee growers, suppliers, and writers for their products such as coffee beans, food products, and written books or articles.

In the US, the big five publication houses control the book publishing market of numerous writers and force them to write as per their needs and at their price.

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Oligopsony Characteristics

The following are the common characteristics of oligopsony market:

  • A few big buyers control the whole market as they can purchase all items sold in the market.
  • These powerful buyers influence product price and quality.
  • Few other options are available to the sellers in the market, offering higher prices than these big players.
  • Each seller works to maximize its profit at the cost of sellers.
  • In the case of natural calamity, sellers are made to bear the losses instead of passing them on to the buyers.
  • Any wastage of products and overproduction is the responsibility of sellers.
  • Likewise, the sellers also bear losses arising from changes in the cyclical demand.
  • There is no safety for the sellers and their products.
  • The buyers reap all the benefits.
  • Customers benefit from lower prices on the products under this system.

Examples

Let us consider a few oligopsony examples in the next sections to clarify the concept:

Example # 1

Let us suppose that three coffee buying companies – Expresso Inc., Cofes Inc., and Cocoan Inc., buy the entire coffee produced globally. Cocoan Inc. decides to pay a lower price than Expresso and Cofes to the coffee producers. Then, in this case,  the coffee producers will try to sell their coffee to Expresso and Cofes instead of Cocoan Inc.

However, Expresso and Cofes decide to follow the suit of Cocoan Inc. and buy coffee at reduced price from the coffee producers. In this scenario, the coffee producers will be forced to sell their produce at a lower price as these three coffee buyers control the coffee market.

Thus, the price of the coffee is controlled by the buyers. They can command the desired prices from the producers. Hence, it is a fine example where a few powerful buyers control the whole market by having the ability to buy the entire produce of the farmers.

Example # 2

Another real-life example is the supermarket industry. All the supermarkets buy bulk products from the producers of goods, toys, food products, and clothing. In many countries, the supermarkets have become too powerful and too big that they control a major portion of retail sales of goods through their stores like the Coles Group and the Woolworths Group in Australia.

Now, let’s assume there are two big supermarkets, ABC Inc. and XYZ Co., controlling 70 percent of the retail market. These two companies decide to buy the products like fish, toys, edible products, books, etc., at lower prices. Since no other alternative supermarkets offer a higher price than this, most producers or sellers have to sell them their products.

Thus, sellers are not in a position to bargain for higher prices due to a lack of options. In such a case, the price of the products in the market will be dictated by the two supermarkets – ABC Inc. and XYZ Co.

Thus, the two strong, powerful giant supermarkets control the entire market of sellers under this buyer-dominant market system.

Oligopoly vs Oligopsony

Both oligopoly and oligopsony represent imperfect competition in the market. Sellers play an important role in the former, whereas buyers play an important role in the latter. However, there are lots of differences between these two terms. Let’s understand the difference using the table for comparison below:

Oligopoly vs Oligopsony

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Frequently Asked Questions

What is an oligopsony market?

It is a form of market that is imperfect due to a large pool of suppliers being controlled by a few dominant buyers. The buyers tend to decide on the price, schedule, and quality of supply of goods without considering the demands and profits of the seller.

What is an example of an oligopsony?

The Hershey Company in the US is the leading chocolate manufacturer. It utilizes a lot of cocoa for its products. Therefore, it procures cocoa beans from numerous farmers competing with each other to sell their cocoa. Thus, in this case, the Hershey Company is acting as a dominant buyer, and this form of buyer-seller relation is an example of oligopsony.

What are monopsony and oligopsony?

Both monopsony and oligopsony are a type of imperfect market favorable for buyers. In a monopsony, there is a single buyer for products offered by several sellers. In contrast, an oligopsony has more than one buyer that can dictate the price of the items provided by the sellers.

This has been a guide to Oligopsony & its Definition. Here we discuss the characteristics of oligopsony market with examples & compare it with oligopoly. You can learn more about accounting from the following articles –

Reader Interactions

Comments

  1. Ramling Malge says

    Reading

  2. Edric says

    A Very comprehensive article. Thank you.

    With love from Nigeria.

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