Monopsony Market: Definition, Characteristics, Strengths, and Disadvantages

Monopsony market is a market in which only one customer exists, and a corporation will act as the only buyer and control market content.

Some of you may still be unfamiliar with this type of market in economic activity. For this reason, on this occasion, we will discuss in full the definition of monopsony and the characteristics, advantages, and disadvantages of monopsony markets.

Definition of Monopsony Market

A monopsony market is a condition in which a company, business, or individual controls the receipt of supply or becomes the only buyer of a product or service in a commodity market. 

Another definition of a monopsony market is a market in which there is only one buyer, usually one business actor, who becomes the sole buyer so that they control the commodity market.

Monopsony market is one form of imperfect competition in which the market is poorly organized. Usually, this monopsony market occurs in several plantation areas and the chicken slaughter industry, so the bargaining position in the farmers’ prices is unreasonable.

This means that there is one or a group of entrepreneurs in this market who controls the market, which makes the potential for competition even more unhealthy.

Since a monopsony market has only one buyer and a few sellers, traders can only depend on that one buyer. This is due to several reasons, such as inadequate market conditions, difficult-to-reach locations, high operating costs, etc.

Factors Forming Monopsony Market

As mentioned earlier, monopsony markets are common in areas of the slaughter animal industry or plantations, where farmers do not have the right to bargain prices.

Meanwhile, several factors that can lead to a monopsony market are the absence of enthusiastic buyers, the location of producers that are difficult to reach, and high operating costs.

One example of this monopsony market is the market for vegetables and dairy cattle in a remote area. It is also difficult to distribute these products to other places to sell to consumers. Thus, farmers and ranchers sell their products to one buyer in bulk or at low prices.

Monopsony Market Characteristics

Monopsony Market
Monopsony Market

As previously discussed, the monopsony market is an imperfect match that has not been well organized. The characteristics of this market are:

1. There is only one buyer

Because there is only one buyer in a monopsony market, that buyer also has an advantage in terms of price and product quality.

In general, each producer will be in a position to accept offers from buyers so that their products can be sold, even at prices that tend to be cheap. These buyers will generally resell the product to producers at a higher price to make a profit.

2. The buyer determines the price

The buyer has complete control over the prices in the market. So, it is not uncommon for the price offered to be not what the farmers expect, but they will still accept it because it is difficult to find other buyers.

Even though the buyer controls the price, provisions and rules must be considered, such as adjusting to the current market price.

3. The Product Is Raw Material

Generally, the products traded in the monopsony market are natural products that the buyer will later sell to other parties.

4. Unequal Income

Generally, these markets are often unfair, where producers or farmers have no role in determining prices, and it will be challenging to develop because the products they sell are bought at low prices.

On the other hand, buyers will get many benefits from both parties, namely from producers or farmers and consumers who buy these products.

5. Frequent Disputes

Disputes between buyers and sellers in this market are considered normal. This condition occurs because the price proposed by the buyer is very far from the expectations of the sellers, so they feel very disadvantaged.

Disputes can also occur due to the presence of a third party, such as the government that has not regulated the price of the product between the two parties.

Monopsony Market Advantages and Disadvantages

There are several advantages and disadvantages of the monopsony market that you should know, including:

1. Advantages of Monopsony Market

  • Guaranteed Quality of Goods

In a monopsony market, total power is controlled by the buyer. For that, the traders in it must be able to meet the needs of their consumers, both in terms of quality and price.

If the quality of the product the seller sells turns out to be low, then the buyer will not want to buy the product. For this reason, this will undoubtedly cause huge losses for traders because they will find it difficult to find other buyers.

The buyer will only want to take the best quality products. For this reason, traders must be able to maintain or improve the quality of their products.

  • Increased Creativity and New Innovations

Iff they want to get high profits with low production costs, traders can increase their innovation in the business fields and the products they can produce.

  • Ease of Determining Prices

As previously explained, the buyer determines the price of the merchant’s product. For this reason, buyers will find it easy to decide on prices in the monopsony market.

The prices they set are also not bound by the country’s deflation or inflation. In addition, buyers will put the same price for all sellers.

  • Smoother Distribution Channel

Buyers in this monopsony market will trade with a wholesale or wholesale system. For that, the sales channel in terms of trade will not be reduced. Meanwhile, the production process will continue.

2. Weaknesses of the Monopsony Market

  • Unfair Buyer Behavior

Often the buyer proposes a price without considering the conditions experienced by the traders or the economic conditions that the traders are experiencing.

This happens because they only think about their interests. A simple example is if the buyer does not want to increase his purchase price due to inflation, even though the seller’s production process is costly.

  • The Buyer Ignores the Seller

The power that the buyer ultimately holds is often misused. With this power, they are not obliged to listen to complaints experienced by traders, such as in terms of prices, production processes, and duration of production.

This will undoubtedly harm the seller because the buyer is selfish when spending his profits.

  • Economic Problems Only Rides on the Seller

Buyers rarely experience economic problems in this case. Why? Because they can make decisions that only benefit themselves.

Commercial operators in this market must overcome various economic conditions, such as inflation, deflation, shortage of raw materials, production difficulties, and other problems.

Prohibition of Monopsony Market Activities

Prohibition of monopsony market activities has been regulated in Article 18 of Law no. 5 of 1999.

Referring to paragraph 1 above, if an economic operator or group of economic operators has 50% shares in a specific type of product or service being controlled, then the operator must be suspected of being the owner of control over the delivery receipt or being the only buyer in that market.

Previous Post Next Post

Formulir Kontak