Monopsony
Meaning :
Monopsony is the Mirror Image of Monopoly. While monopoly refers to the single seller of a commodity, monopsony refers to the single buyer of a commodity.
Definition :
Monopsony is a situation where there is a single buyer of the product who is not in competition with other buyers for the product which it purchases and in which the entry into the market by other buyers is impossible.
Monopsony applies to any situation in which there is monopoly element in buying. The single buyer is called a monopsonist.
Example, the government is a monopsonist in the market while purchasing variety of goods for defence requirements.
Labour market, example – a mining firm or a brick kiln in a village is the sole buyer (employer) of some specialised type of labour.
Features of Monopsony:
1. Single Buyer
2. Large number of sellers
3. Specialised product
4. Lack of Mobility
5. Price maker
1.Single Buyer:
- The characteristic feature of monopsony is the single buyer of the commodity, service or input.
- There is only one firm purchasing the entire product of factor service.
2. Large number of sellers:
- While there is one buyer, the number of sellers or suppliers for the commodity or factor service are very large in monopsony.
- Example, Labour market – a single employer faces a large number of workers.
3. Specialised Product or Input:
- This feature is an important condition for the existence of monopsony, that the product or service supplied by the seller is specialised.
- In monopsony the product or input service supplied by the sellers is specialised to monopsonist firm only and can not be used by any other firm producing similar product.
- Example, radiator supplied by a supplier to Maruti Udyog limited can be used in Maruti cars only and can not be used in Hundai or Honda.
4. Lack of Mobility:
- To maintain the characteristic feature of single buyer of monopsony it is essential to restrict the mobility of the product or service supplier.
- In the case of labour market, monopsony can emerge only if there is lack of geographical or occupational mobility.
- If the workers are mobile so that they can move to place or industries where the wages are higher than in monopsonist labour market the monopsony will break down, because monopsonist will no longer be the sole buyer of the labour service.
- On the other hand, if the workers are emotionally attached to a given locality i.e. family ties, friends etc.,they are unwilling to move to other areas hence the monopsony will persist.
5. Price Maker:
- In monopsony, there is only one buyer while the sellers are in large number. The buyer has full market power on price determination.
- Thus, it can offer any price for the product it buys and supplier must either accept the price or stop supplying to the monopsonist.
- Example, monopsonist in some labour market can offer any wage rate and workers must either work at that wage or move to other markets i.e. change occupation or locations.
Demand Curve of the Firms under different Market Forms:
Demand curve of a firm under Different Market Forms
- The demand curve of a firm shows, different quantities of its product which is able to sell at different prices. It is nothing but Average Revenue Curve (AR curve) of the firm.
- Perfect competition –
An AR curve or Demand curve for perfect competition market firm is Perfectly Elastic i.e. parallel to X – axis.
Because the firm is not required to reduce the price to sell more.
- A firm under monopoly or monopolistic competition faces a negative sloping Average Revenue (A R) curve, because it is required to reduce the price if it wants to sell more.
- A monopolistic firm faces a less elastic negative sloping curve because the firm has full control over price and it is required to reduce the price to sell more.
- A firm under monopolistic competition faces a more elastic Average Revenue (AR) curve which is downward sloping since every firm sells a differentiated product, each firm has some control over price. It can sell more by lowering the price of its product.
- Due to existence of the rival firms producing close substitutes, the demand curve (AR curve) of monopolistic competition firm will be more elastic than that of monopolist firm.