Oligopsony Definition | Oligopsony Characteristics
What is Oligopsony?
Oligopsony is a market form in which there are only a few buyers of goods or services. The sellers have little bargaining power and the buyers can set prices as they wish.
Oligopsony is the type of market that only has a few buyers in it. The word is derived from the words oligo, meaning “few”, and the word “pæson” which means “buyers”. These types of markets have a few buyers bidding on a good. In this type of market, the few buyers can have a huge impact on the price.
This type of market structure is most common when there are only one or two major suppliers, such as agricultural products like wheat, corn, soybeans, etc., but it can also happen with other types of commodities
Oligopsony is an economic state where a small number of suppliers dominate the market. The term was first used by J.A. Schumpeter in his book “Capitalism, Socialism, and Democracy”.
Oligopsony is a subset of monopolistic competition. It can be caused by various factors such as economies of scale or government regulation. Though it is a form of imperfect market, oligopsony is not the worst possible outcome because it does not have the barriers to entry that other types of monopolies do and has an incentive for firms to compete on price.
The only requirement for oligopsony is that the cost of goods must be low enough for a small number of firms to become important.
In any oligopsony, there will be at least one firm. These firms are called “dominant producers” or “dominant firms” and they are the ones that set prices and determine which companies sell what type of goods. As long as these dominant firms create an economy of scale, this form of competition should not be harmful as long as the dominant firms have no barriers to entry. Oligopsony is in most cases a more desirable state than a monopoly because there are more firms and fewer barriers to entry.
In perfect oligopsonies, dominant firms have large economies of scale which make it impossible for new companies to enter the market.
Imperfect oligopsony is similar to perfect oligopsony except that there is a barrier to entry. When there is a barrier to entry, no new firms can enter and the state of the market deteriorates.
A market with a small number of buyers, or oligopsonists. The ability to control the price and quantity of goods that are purchased by an individual buyer. This is often done through collusion between firms in order to maximize profits
An oligopsony is a market form where there are only a few buyers of goods and services, as opposed to many. Oligopsonies can be contrasted with monopsonies, which are markets with only one buyer.
A market with only a few buyers. When the number of sellers is greater than the number of buyers, there is competition. The result of this imbalance can be higher prices for consumers and lower profits for producers
How Oligopsony is Formed
Oligopsony can occur for various reasons including government regulation or economies of scale.
Economies of scale Oligopsony
Economies of scale are a factor that can cause a firm to become oligopsony, especially in industries like transportation and production. For example, if a firm is more efficient than other firms, it will naturally grow because it can produce more products with fewer resources. However, no other company will be able to create enough economies of scale to compete with the original firm which will end up becoming an oligopsony.
Oligopsony through government regulation
In industries where there are laws that regulate the size of the entity, oligopolistic competition might occur because companies do not want to fulfill the regulations. In this case, there is a barrier to entry that ends up eliminating competition
. This is similar to perfect oligopsony but the barrier to entry is different. There are laws that regulate the size of companies and force them out of business because they exceed the limits that are set. In some cases, laws may be passed that limit the growth of a business which becomes an oligopsony.
If government regulations make it so that industry is protected, then no new firms will be able to enter the market if there is a barrier to entry. This puts the dominant firms in a position of power because they have no competition.
This type of oligopsony can occur in an industry where there are strict environmental standards. Since it is too expensive and difficult to meet those standards, new companies will not enter that market and the dominant firm will set prices as they wish.
If a country has oligopoly price competition, then it is said to be operating in a “parallel” or “non-intersecting” plane of competition. The government must administer policies that ensure producers do not behave as dominant firms by making this type of market structure work efficiently through rules and regulations. One method of regulating oligopoly is through the use of import tariffs that are designed to protect domestic firms from foreign competition.
In addition, there is a way to analyze oligopoly prices for the government to figure out whether import tariffs should be implemented or not. The Lerner index is used to determine whether the country should impose tariffs on imports.
While small firms may benefit from a decrease in competition, large firms will likely lose out in this market because of the need for economies of scale and due to the fact that they already have high production costs. Consumers also lose in this situation because prices rise due to less competition within the industry.
Examples of Oligopsony
An example of an oligopsony would be the case of cotton growers in the early 20th century. The government of the United States passed the Farm Bill of 1933, which created price supports for agricultural products. This made it difficult for small farmers to find buyers and get fair prices for their cotton.
Another example is the case of the Canadian railways. While there are several railways in Canada, they are all owned by large foreign companies (which have no intentions of breaking up any time soon). The railway companies own a majority stake in Canadian National Railway Company and about half of Canadian Pacific Railway Ltd.
Oligopoly Vs Oligopsony Market
- Oligopoly is a market with few sellers, while oligopsony is a market with few buyers.
- In an oligopoly, the sellers compete to drive down prices and maximize profits; in an oligopsony, the buyers compete to drive up prices and minimize losses.
- The difference between these two markets can be seen in their names: “olig” means few or small; “pono” means many or large
Oligopolies can be classified as either perfect or imperfect depending on how many firms exist in the market. A perfect oligopoly has an equal number of firms, while an imperfect one does not have this balance.
In both cases, each firm has significant control over price because they are so few in number and their products are very similar to each other’s
Examples of Oligopoly Market
Examples of oligopolies include petroleum companies, steel, and automobile manufacturers. Because these industries have a high barrier to entry, there are few competitors. This is why many of these industries are sometimes referred to as natural monopolies, due to the fact that they have economies of scale (which makes them more efficient at producing a product).