Prospective employees are forced to settle for the wages set by the employer in a monopsony, even if the rates are below market. In the area of the labor market, there is another way monopsonies can be formed. If several large firms have an agreement to not compete with each other, they can collectively drive down wages to suit their profit margins. This was the case with the Silicon Valley Labor Scandal, in which it was alleged that several tech corporations, including Apple, Intel, Google, and Pixar shared similar wage scales and agreed to not hire from each other.
Like many monopolies, monopsonies tend to be frowned upon due to the overwhelming power and control they can wield. They can thrive in societies that have poor wage regulation and other market protection rules.
American Tobacco Company , which like the others, had a monopoly on the tobacco industry. Up until the Sherman Anti-Trust Act in , these and other monopolies of the day had the power to keep the prices of their respective products as high as they wanted.
Today, there are still a number of companies that, for one reason or another, are considered near-monopolies in their respective markets. The list includes:. With that said, some utility companies and essential services are allowed to be have limited monopoly freedoms due to their nature of business. Gas, water, and electricity companies, for instance, have broad-based infrastructures and assets, and offer services that are required to be stable and reliable, so governments would grant permission for them to have a near-monopoly to protect their business interests.
However, such firms normally face tight regulations and are subject to review from time to time. Some studies on monopsony power often use coal towns as classic examples. This is where, in the past, some coal companies were often sole employers in their respective towns. The inability of workers to find jobs elsewhere meant they had to settle for whatever wage scale the coal companies offered.
Today, Walmart is among companies accused of wielding monopsony power. Walmart dominates discount retail, making it the main purchaser of low-cost products in its market.
There are also entities which are known for being monopsonistic but which are made so under government law due to the specific nature of their business. The US Department of Defense is one such example based on the fact that it is the sole buyer of fighter jets and other military-related products that cannot lawfully be purchased by other firms or individuals.
Left unchecked, monopolies and monopsonies can lead to societal inequalities, as well as lack of innovation and diversity. Understanding them is helpful for protection of small businesses, which may fail due to their inability to compete in the absence of a level playing field. Monopolies effectively eliminate economic competition for production of a particular good, including possible substitutes for it. Other firms are not able to enter the market. Monopolies also prevent external influences on the selling price for goods or services.
In this way, they circumvent the natural economic laws of supply and demand. Buyers have no choice, and thus, no buying power. A monopolistic company can set prices however it chooses and can change them at any time for any reason—resulting in high profits. The existence of either a monopoly or a monopsony is sometimes attributed to a lack of government regulation in the form of antitrust laws.
A monopsony refers to a situation that involves control of the market through which specific goods or services are purchased. Monopsonies arise when individuals, corporate groups, or other entities are able to position themselves as the sole purchasers for a particular good or service.
A monopsonistic company is thus able to use competition among suppliers or wholesalers to its advantage, driving down the selling or asking price for the given good or service. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Business Essentials Guide to Mergers and Acquisitions.
Business Business Essentials. Monopoly vs. Monopsony: An Overview Both a monopoly and a monopsony signify conditions of imperfect competition , in which a single entity can influence what would otherwise be a free market operating under the laws of supply and demand.
Key Takeaways Both a monopoly and a monopsony refer to a single entity influencing and distorting a free market. In a monopoly, a single seller controls or dominates the supply of goods and services.
In a monopsony, a single buyer controls or dominates the demand for goods and services. Both a monopoly and monopsony can result in high profits for the dominant entity but often are considered illegal because they inhibit competition. Article Sources. Investopedia requires writers to use primary sources to support their work.
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