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TRANSFERRABLE OUTPUT: An output that has a relatively large geographic market area due to the low cost of transportation. The low transportation cost means it is easier (that is, less expensive) to bring the output to the consumers rather than locating consumers near the output. Like many things, transferrable outputs are a matter of degree. At the other end of the spectrum lies local outputs. Most manufactured goods tend to have a high degree of transferability. Information, especially through television broadcasting and Internet web sites, is also relatively easily transported.

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OLIGOPSONY:

A market characterized by a small number of large buyers controlling the buying-side of a market. Oligopsony is the buying-side equivalent of a selling-side oligopoly. Much as a oligopoly is a market dominated by a few large sellers, oligopsony is a market dominated by a few large buyers. While oligopsony could be analyzed for any type of market it tends to be most relevant for factor markets in which a handful of firms control the buying of a factor. Two related buying side market structures are monopsony and monopsonistic competition.
Oligopsony is a market in which a small number of buyers dominate the demand for a good. While the market for any type of good, service, resource, or commodity can, in principle, function as oligopsony, this form of market structure tends to be most pronounce for the exchange of factor services.

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

Much of the standard analysis that applies to oligopoly also applies to oligopsony. It is not unusual for a group of firms in an industry to be oligopoly sellers of their output and oligopsony buyers of inputs. When a small number of relatively large firms dominate an industry, they tend to dominate most facets of the industry.

The reason the term oligopsony is seldom used is that the term oligopoly usually covers the entire range of output selling AND INPUT BUYING activities. If, for example, a few firms dominate the output market for computers as oligopoly sellers, then they are also likely to dominate the input market for computer components, such as silicon chips, hard disk drives, and programmers, as oligopsony buyers. If a few firms are oligopoly sellers of gasoline, then they are also likely to be oligopoly buyers of petroleum.

Characteristics

The three most important characteristics of oligopsony are: (1) an industry dominated by a small number of large buyers, (2) sellers face few alternatives for their goods, and (3) the industry has significant barriers to entry.
  • Small Number of Large Buyers: An oligopsony market is dominated by a small number of large buyers, each of which is relatively large compared to the overall size of the market. This generates substantial market control, the extent of market control depending on the number and size of the buyers.

  • Few Alternatives: An oligopsony arises because sellers have few alternatives available for the goods they sell. While alternative buyers might exist, they tend to be less desirable.

  • Barriers to Entry: Firms in a oligopsony market attain and retain market control through barriers to entry. The most common barriers to entry include patents, resource ownership, government franchises, start-up cost, brand name recognition, and decreasing average costs. Each of these make it extremely difficult, if not impossible, for potential competitors to enter the market.

Behavior

As the buying side counterpart to oligopoly, oligopsony tends to exhibit the same type of behavior: (1) interdependence, (2) rigid prices, (3) nonprice competition, (4) mergers, and (5) collusion.
  • Interdependence: Each oligopsonistic buyer keeps a close eye on the activities of other buyers in the industry. Decisions made by one buyer invariably affect others and are invariably affected by others. Competition among interdependent oligopoly buyers is comparable to a game or an athletic contest. One team's success depends not only on its own actions but the actions of its competitor. Oligopsonistic buyers engage in competition among the few.

  • Rigid Prices: Many oligopsonistic industries (not all, but many) tend to keep the prices they pay relatively constant, preferring to compete in ways that do not involve changing the price. The prime reason for rigid prices is that competitors are likely to match price increases, but not price decreases. As such, a buyer has little to gain from changing prices.

  • Nonprice Competition: Because oligopsonistic buyers have little to gain through price competition, they generally rely on nonprice methods of competition. Oligopsonistic employers, for example, are likely to compete through working conditions, fringe benefits, and assorted nonwage amenities.

  • Mergers: Like their oligopoly counterparts, oligopsonistic buyers perpetually balance competition against cooperation. They often pursue cooperation through mergers--legally combining two separate buyers into a single buyer. Because oligopsonistic industries have a small number of buyers, the incentive to merge is quite high. Doing so gives the resulting buyer greater market control.

  • Collusion: Another common method of cooperation is through collusion--two or more buyers that secretly agree to control prices, purchasing, or other aspects of the market. When done right, collusion means that the buyers behave as if they were one buyer, a monopsony. As such they can set a monopsony price, buy a monopsony quantity, and allocate resources as inefficiently as a monopsony.

The Other Three Market Structures

Market Structure Continuum
Market Structure Continuum
Oligopsony is one of four market structures that arise in the analysis of factor markets. The other three are: perfect competition, monopsony, and monopsonistic competition. 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 right, is oligopsony, characterized by a small number of larger buyers and a great deal of 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.

  • 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.

  • Monopsonistic Competition: Also in the middle of the market structure continuum, but residing closer to perfect competition, is monopsonistic competition, characterized by a large number of relatively small competitors, each with a modest degree of market control. This is the buying side counterpart of monopolistic competition on the selling side. A substantial number of real world markets fit the characteristics of monopsonistic competition.

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Recommended Citation:

OLIGOPSONY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: December 16, 2018].


Check Out These Related Terms...

     | monopsony | monopsonistic competition | bilateral monopoly | oligopoly |


Or For A Little Background...

     | factor market analysis | factor demand | factor supply | marginal productivity theory | profit maximization | efficiency | barriers to entry | market control | market structures | oligopoly, behavior | oligopoly, characteristics | competition among the few |


And For Further Study...

     | perfect competition, factor market analysis | bilateral monopoly, factor market analysis | factor market, efficiency | compensating wage differentials | monopsony, efficiency | monopsony, minimum wage | monopsony, factor market analysis |


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