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

• 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

• 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

• 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.