Monopsony

The term monopsony refers to the condition under which a single buyer sets prices in its market. This condition contrasts that of “monopoly” where a single seller sets prices.

In some cases, a monopsonist faces separate suppliers. For example, a remote town' sole employer may buy labor from a relatively large set of unorganized laborers. In other cases, a monopsonist faces a single supplier or a coordinated set of suppliers. Here, a large employer may buy labor from an organized set of labor (such as a union). The case where a single supplier faces a single buyer is sometimes referred to as a “bilateral monopoly.”

Single-buyer health care programs offer a salient example of monopsonistic power. By aggregating the purchasing power of otherwise diffuse consumers, such organizations can pressure health care providers to lower their supply price. In this respect, the monopsonist can clearly check producers’ potential market power.

The welfare consequences of this check, however, are less obvious. For example, to the extent that a monopsonist' activities encourage suppliers with market power to increase production, a monopsonist can increase welfare. However, these same efforts can decrease welfare if, for example, they reduce the cost of overturning patent protection.

Patent protection, in effect, confers monopoly power onto producers for a limited period of time. During this period, the monopolist can charge a price that exceeds society' “optimal” price. But this inflated price also encourages producers to engage in potentially welfare-enhancing research and development. Absent such price protection, or when this protection is ephemeral, a producer' claim to benefits that it creates are exposed to a relatively large expropriation risk. Consequently, producers will be reluctant to sink resources into producing future benefits.

[Page 373]Monopsonists, in principle, have an increased capacity to opportunistically overturn such protections, and thus increase this expropriation risk. In effect, a monopsonist is an organized interest whose constituency includes buyers. Buyers, in turn, prefer low prices (holding all else constant). The monopsonist' organizational capabilities thus increases buyers’ ability to opportunistically retract patent protection or retard an innovator' ability to extract payment for the innovation. Although creating an immediate windfall for buyers, however, such an action can reduce net welfare in the long run. Indeed, to the extent that suppliers require price protection or pricing power to invest in knowledge production, a monopsonist' bargaining power can retard the rate at which an economy innovates.

Other channels also exist through which concentrating power in a single buyer can reduce welfare. For example, by aggregating the demands of its constituents, the single-payer precludes individuals from paying a price that exceeds that which the monopsonist sets. Individuals may value this opportunity if, say, the quantity available from a monopsonist does not satisfy their demand.

Like monopolistic power, monopsonistic power thus produces costs and benefits. If these market conditions were to produce only costs or only benefits, debates regarding their regulation would not be so contentious.