oligopsony

Oligopsony is a market structure in which a small number of buyers accounts for the majority of demand for a particular good or service. This concentration gives buyers substantial market power over sellers, allowing them to influence prices and other terms of sale. It is distinct from perfect competition, where many buyers compete, and from monopsony, where there is a single buyer.

Key features include a concentrated buyer side, barriers to entry or switching costs for sellers, and the potential for buyers to set terms through long-term contracts or non-price arrangements. Sellers in an oligopsonistic market may have limited alternatives, making them more dependent on the few available buyers. The structure can arise from industry consolidation, vertical integration, or significant differences in information and bargaining leverage across participants.

Common examples occur in agricultural and labor markets. For instance, a handful of large processors or retailers may dominate the purchase of certain crops, shaping prices paid to farmers. In regional labor markets, a few large employers can exert influence over wages and working conditions.

Economic effects are mixed but often include lower prices or less favorable terms for sellers relative to competitive benchmarks, potential reductions in seller welfare, and possible efficiency gains if buyer coordination improves procurement performance. However, there is also a risk of reduced dynamic efficiency and innovation due to dampened competition.

Policy responses focus on promoting competition and supplier diversification, carefully applying antitrust or competition laws, and, where appropriate, regulating procurement terms or encouraging entry by alternative buyers. Economists analyze oligopsony using residual demand concepts and price-cost margins to assess the degree of buyer market power.