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ECONOMIC THINKING: A way of looking at, and analyzing, the way the world works by comparing the costs of an action with the benefits generated. Economic thinking arises from scarcity, which exists because wants and needs and unlimited but resources are limited. This means virtually all actions incur an opportunity cost. Identifying the cost of an action, no matter how hidden or subtle it may be, is the essence of economic thinking.

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MONOPSONISTIC COMPETITION:

A market structure characterized by a large number of small buyers, that purchase similar but not identical inputs, have relative freedom of entry into and exit out of the industry, and possess extensive knowledge of prices and technology. Monopsonistic competition is the buying-side equivalent of a selling-side monopolistic competition. Much as a monopolistic competition is a competitive market containing a number of small sellers, monopsonistic competition is a market containing a number of small buyers. While monopsonistic competition could be analyzed for any type of market it tends to be most relevant for factor markets. Two related buying-side market structures are monopsony and oligopsony.
Monopsonistic competition is a market in which a large number of relatively small buyers purchase goods (usually factor inputs) that are similar but not identical. While the market for any type of good, service, resource, or commodity can, in principle, function as monopsonistic competition, this form of market structure tends to be most pronounced for the exchange of factor services.

This market structure is the somewhat obscure and less noted buying counterpart of monopolistic competition. However, monopsonistic competition tends to be just as prevalent in the real world. In fact, firms operating as monopolistic competition in an output market often operate as monopsonistic competition in an input market.

In much the same way the monopolistic competition is a cross between perfect competition and monopoly, monopsonistic competition is a cross between perfect competition and monopsony. While each monopsonistically competitive buyer has very little market control, it does have some market control, each has its own little monopsony, each faces an input supply curve that is relatively elastic but NOT perfectly elastic.

Characteristics

The four characteristics of monopsonistic competition are much like those of monopolistic competition: (1) large number of small buyers, (2) similar, but not identical products, (3) relative, but not perfect resource mobility, and (4) extensive, but not perfect knowledge.
  • Large Number of Small Buyers: A monopsonistically competitive market contains a large number of small buyers, each of which is relatively small compared to the overall size of the market. This ensures that all buyers are relatively competitive with very little market control over price or quantity. In particular, each firm has hundreds or even thousands of potential competitors.

  • Similar Products: Each firm in a monopsonistically competitive market buys a similar, but not absolutely identical, product. The goods purchased by each of the buyers are close substitutes for one another, just not perfect substitutes. Most important, each good provides the same basic function, especially as productive inputs. The goods might have subtle but actual physical differences or they might only be perceived different by the buyers. Whatever the reason, buyers treat the goods as similar, but different.

  • Relative Resource Mobility: Monopsonistically competitive buyers are relatively free to enter and exit a market. There might be a few restrictions, but not many. These buyers are not "perfectly" mobile as with perfect competition, but they are relatively unrestricted by government rules and regulations, start-up cost, or other substantial barriers to entry.

  • Extensive Knowledge: In monopsonistic competition, buyers do not know everything, but that have relatively complete information about alternative prices. They also have relatively complete information about product or factor differences.

Real World (In)Efficiency

A monopsonistically competitive buyer generally purchases less output and pays a lower price than would be the case for perfect competition. In particular, the price paid by a monopsonistically competitive buyer is less than the marginal revenue product.

The inequality of price and marginal revenue product violates the key condition for efficiency. Resources are NOT being used to generate the highest possible level of satisfaction.

The reason for this inefficiency is found with market control. Because a monopsonistically competitive firm has control over a small slice of the market, it faces a positively-sloped supply curve and price is greater than marginal factor cost, which is set equal to marginal revenue product when maximizing profit.

While monopsonistic competition is technically inefficient, it tends to be less inefficient than other market structures on the buying side, especially monopsony. Even though price is less than marginal factor cost (and thus marginal revenue product), because the supply curve is relatively elastic, the difference is often relatively small.

For example, a monopsony that pays a $20 price while facing a marginal revenue product of $100 creates a serious inefficiency problem. In contrast, the inefficiency created by a monopsonistically competitive buyer that pays a $49.95 price while generating a marginal revenue product of $50 is substantially less.

The closer marginal factor cost is to factor price, the closer a monopsonistically competitive firm comes to allocating resources according to the efficiency benchmark established by perfect competition.

In the grand scheme of economic problems, the inefficiency created by monopsonistic competition seldom warrants much attention... and deservedly so.

The Other Three Market Structures

Market Structure Continuum
Market Structure Continuum
Monopsonistic competition is one of four market structures that arise in the analysis of factor markets. The other three are: perfect competition, oligopsony, and monopsony. The exhibit to the right illustrates how these four market structures form a continuum based on the relative degree of market control and the number of competitors in the market. In the middle of the market structure continuum, edging toward the left, is monopsonistic competition, characterized by a large number of relatively small buyers and minimal market control.
  • Perfect Competition: To the far left of the market structure continuum is perfect competition, characterized by a large number of relatively small competitors, each with no market control. Perfect competition is an idealized market structure that provides a benchmark for evaluating the efficiency of the other market structures.

  • Oligopsony: In the middle of the market structure continuum, residing closer to monopsony, is oligopsony, characterized by a small number of relatively large competitors, each with substantial market control. This is the buying-side counterpart of oligopoly on the selling side. A substantial number of real world markets fit the characteristics of oligopsony.

  • Monopsony: To the far right of the market structure continuum is monopsony, characterized by a single buyer with complete market control over the demand side of the market. This is the buying-side counterpart of monopoly on the selling side.

<= MONOPOLY, TOTAL ANALYSISMONOPSONY =>


Recommended Citation:

MONOPSONISTIC COMPETITION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: April 25, 2018].


Check Out These Related Terms...

     | oligopsony | monopsony | bilateral monopoly | monopoly | monopsony, efficiency | monopsony, minimum wage | monopsony, factor market analysis |


Or For A Little Background...

     | factor market analysis | factor demand | factor supply | marginal factor cost | marginal factor cost curve, monopsony | profit maximization | efficiency | market control | market structures | monopolistic competition | product differentiation | competition among the many |


And For Further Study...

     | perfect competition, factor market analysis | bilateral monopoly, factor market analysis | factor market, efficiency | compensating wage differentials | monopoly, short-run production analysis | imperfect competition |


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