Imperfect Competition - Concept of Monopsony

Monopsony is a market situation in which there is only one buyer of a good, service, or factor of production (like labour), and many sellers. The single buyer has the power to influence the price it pays.

Monopsony is a market structure in which a single buyer (monopsonist) purchases the entire supply of a particular product or factor service, faces many sellers, and the entry of other buyers is very difficult or impossible.

1] Single buyer

• There is only one buyer in the market for a particular good or factor.
• This buyer purchases a major share or the entire supply.

2] Many sellers or suppliers

• There are many sellers of the product or factor service.
• Example: In a monopsony labour market, one employer faces many workers.

3] Specialised product or input

• The suppliers provide a specialised input which is mainly useful to this one buyer.
• Because the input cannot easily be sold to others, suppliers become dependent on the monopsonist.

4] Lack of mobility of suppliers (especially labour)

• Workers may be geographically or occupationally immobile.
• Reasons: family ties, lack of money to move, no other industries nearby, or lack of required skills.
• Due to low mobility, workers cannot easily leave the monopsonist, which increases its power.

5] Buyer is a price-maker

• Like a monopolist fixes the selling price, a monopsonist can influence the buying price (wage or input price).
• Sellers must accept the price offered or stop selling, because they have few or no alternative buyers.

6] Imperfect competition on buying side

• The monopsonist has market power as a buyer.
• It is not a “price taker”; it decides how much to buy and at what price.

• Joan Violet Robinson (1903–1983) was a British economist and a key member of the Cambridge school of economics.
• She worked on imperfect competition, labour markets, and growth.
• She helped develop the theory of monopsony in the labour market.
• Famous Indian economists like Dr Manmohan Singh and Dr Amartya Sen studied under her at Cambridge.

1. Government as buyer of defence goods

• Defence equipment such as missiles, warships, and certain communication systems is usually purchased only by the government.
• Thus, the government is almost the only buyer, so it behaves like a monopsonist for such products.

2. Single car company and specialised parts

• A car manufacturer may buy a special type of radiator or component designed only for its own model.
• Small firms may produce this part only for that company and have no other major buyer.

3. Mining firm or brick kiln in a village

• In a small town or village, one large mine or brick kiln may be the main employer of local workers.
• Workers depend on this one employer for jobs, so the firm has monopsony power in the local labour market.

• Monopsony: one buyer, many sellers; buyer has market power.
• Monopsonist: the single powerful buyer.
• Main features: single buyer, many sellers, specialised input, low mobility of suppliers, buyer is price-maker.
• Common in labour markets (single large employer in a region; government as large employer).
• Joan Robinson is closely linked with the analysis of monopsony and imperfect competition.