The word oligopsony comes from the Greek words "oligos" which means little, and "psonio" which means buy. Completely opposed to the Oligopoly, where power belongs to the producers or sellers. It is a market and competition situated in what we normally know as imperfect competition, which arises within a market and in which there is a small number of plaintiffs in whom all control and power is left over the prices of different products and over the quantities of a product in the market. This means that, the benefits are mainly for buyers who have an intermediary role, not so in the producers, who are going to be affected when their situation gets worse because they do not get a reasonable price for the products they make. There are many suppliers, but very few demanders, in other words, all power lies in the buyer's hands.
What is oligopsony?
Oligopsony is part of the imperfect competition that occurs in a market in which there are few demanders, and in them all control and power is delegated over the different prices of products and over the quantities generated from it, buyers are the most benefited by acting as intermediaries.
- Oligopsony is developed within the framework of an imperfect competitive market and for this reason, we can see that the buyers are the ones who can exercise all the power over the conditions presented by the market.
- The different companies that make up the Oligopsony are interdependent, that is, the policies and decisions that are taken in one of the companies that are part of it, will have a series of direct repercussions on the rest of the companies.
- The type of products in this kind of market are usually homogeneous.
- The plaintiff companies make sure to acquire extraordinary profits always taking care that these profits do not attract competition in their market.
- The number of buyers is quite small for each product or service offered.
- The price of the products is influenced because the number of buyers is very low.
Some of the advantages that we can observe inside an oligopsony are:
- Buyers have the power to determine product prices.
- There is no competition on the part of the demand and the influence of the same within the market is absolute.
- They have the advantage that they don’t need to hire a lot of staff.
- In oligopsony, there is the possibility of being able to acquire the quantity of products desired at the prevailing price without exerting any kind of influence on the price already established.
- Another outstanding characteristic of this type of market is that the greater the elasticity of the offer of a certain product, the lesser the effect it may have on the price.
- There is a very close relationship between monopoly and monopsony, because a monopoly company will very easily become the sole purchaser of many products, mainly products such as raw materials, semi-finished products and other types of inputs of this nature.
- Product sellers do not have the ability to impose any conditions on their goods or products.
- Products, goods or services must be adapted to buyers’ demands in terms of price and quantity.
- It can lead to a loss of efficiency because it reduces the surplus of producers without being able to compensate.
- If there are a large number of bidders and a single plaintiff, it could produce extreme situations of deficits.
Examples of oligopsony
Some examples that we can observe commonly and that many times we do not know are mentioned below.
- Airplane sales: As we know, not every person has the capacity to acquire or buy a private airplane, only the countries’ governments or big tycoons and businessmen could have the purchasing capacity to acquire this type of transport. For this reason, the number of aircraft buyers is extremely small, and sellers must apply flexibility when selling, in order to avoid losing the competition.
- Cinemas: The facilities that we observe inside the cinemas are unique places because they need a giant screen to be able to project the films, for this reason the people in charge of manufacturing this type of screens have a very reduced number of buyers.
- Submarine manufacturers: The sale of submarines is strictly limited to the armies and military of some countries, so the buyers are not on a large scale.
- Restoration of old cars: The companies that repair old cars are very few, and the people who own this type of car are also limited.
- Car manufacturers: This type of companies will need large specialized machines to assemble a chassis, for this reason, tool manufacturers have a very limited clientele with whom they must agree fair prices for both parties.
Written by Gabriela Briceño V.