Oligopsony
Encyclopedia
An oligopsony is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in a market for inputs where numerous suppliers are competing to sell their product to a small number of (often large and powerful) buyers. It contrasts with an oligopoly
, where there are many buyers but few sellers. An oligopsony is a form of imperfect competition
.
The terms monopoly
(one seller), monopsony
(one buyer), and bilateral monopoly
have a similar relationship.
One example of an oligopsony in the world economy is cocoa, where three firms (Cargill
, Archer Daniels Midland
, and Callebaut
) buy the vast majority of world cocoa bean production, mostly from small farmers in third-world countries. Likewise, American tobacco
growers face an oligopsony of cigarette
makers, where three companies (Altria
, Brown & Williamson
, and Lorillard Tobacco Company
) buy almost 90% of all tobacco grown in the US.
In each of these cases, the buyers have a major advantage over the sellers. They can play off one supplier against another, thus lowering their costs. They can also dictate exact specifications to suppliers, for delivery schedules, quality, and (in the case of agricultural products) crop varieties. They also pass off much of the risks of overproduction, natural losses, and variations in cyclical demand to the suppliers.
Oligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...
, where there are many buyers but few sellers. An oligopsony is a form of imperfect competition
Imperfect competition
In economic theory, imperfect competition is the competitive situation in any market where the conditions necessary for perfect competition are not satisfied...
.
The terms monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
(one seller), monopsony
Monopsony
In economics, a monopsony is a market form in which only one buyer faces many sellers. It is an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers...
(one buyer), and bilateral monopoly
Bilateral monopoly
In a bilateral monopoly there is both a monopoly and monopsony in the same market.In such, market price and output will be determined by forces like bargaining power of both buyer and seller...
have a similar relationship.
One example of an oligopsony in the world economy is cocoa, where three firms (Cargill
Cargill
Cargill, Incorporated is a privately held, multinational corporation based in Minnetonka, Minnesota. Founded in 1865, it is now the largest privately held corporation in the United States in terms of revenue. If it were a public company, it would rank, as of 2011, number 13 on the Fortune 500,...
, Archer Daniels Midland
Archer Daniels Midland
The Archer Daniels Midland Company is a conglomerate headquartered in Decatur, Illinois. ADM operates more than 270 plants worldwide, where cereal grains and oilseeds are processed into products used in food, beverage, nutraceutical, industrial and animal feed markets worldwide.ADM was named the...
, and Callebaut
Callebaut
Callebaut was a Belgian company and a major producer of chocolate for consumers and for professional chocolatiers. As of 1996 it is a part of the Swiss company Barry Callebaut...
) buy the vast majority of world cocoa bean production, mostly from small farmers in third-world countries. Likewise, American tobacco
Tobacco
Tobacco is an agricultural product processed from the leaves of plants in the genus Nicotiana. It can be consumed, used as a pesticide and, in the form of nicotine tartrate, used in some medicines...
growers face an oligopsony of cigarette
Cigarette
A cigarette is a small roll of finely cut tobacco leaves wrapped in a cylinder of thin paper for smoking. The cigarette is ignited at one end and allowed to smoulder; its smoke is inhaled from the other end, which is held in or to the mouth and in some cases a cigarette holder may be used as well...
makers, where three companies (Altria
Altria Group
Altria Group, Inc. is based in Henrico County, Virginia, and is the parent company of Philip Morris USA, John Middleton, Inc., U.S. Smokeless Tobacco Company, Inc., Philip Morris Capital Corporation, and Chateau Ste. Michelle Wine Estates. It is one of the world's largest tobacco corporations...
, Brown & Williamson
Brown & Williamson
Brown & Williamson was an American tobacco company and subsidiary of the giant British American Tobacco, that produced several popular cigarette brands. It became infamous as the focus of investigations for chemically enhancing the addictiveness of cigarettes...
, and Lorillard Tobacco Company
Lorillard Tobacco Company
Lorillard Tobacco Company is an American tobacco company marketing cigarettes under the brand names Newport, Maverick, Old Gold, Kent, True, Satin, and Max. Lorillard is a member of the National Black Chamber of Commerce.- History :...
) buy almost 90% of all tobacco grown in the US.
In each of these cases, the buyers have a major advantage over the sellers. They can play off one supplier against another, thus lowering their costs. They can also dictate exact specifications to suppliers, for delivery schedules, quality, and (in the case of agricultural products) crop varieties. They also pass off much of the risks of overproduction, natural losses, and variations in cyclical demand to the suppliers.