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If you are looking for the difference between a monopoly and a monopsony, look no further!
In this article we will explain the difference between a monopoly and a monopsony and provide some examples.
What is the difference between a monopoly and a monopsony?
A monopoly happens when a single entity dominates the market and becomes the single seller of a particular item or service. A monopsony is similar but occurs when a single buyer dominates the sellers’ market.
You’re probably familiar with the word monopoly. It happens when a company completely dominates an industry, squashing opponents to the point of negligible competition.
This makes them impervious to market forces, so they can dictate terms as they wish.
On the other hand, a monopsony shares some features of a monopoly, with a few differences, so keep reading to learn more about the differences between a monopoly and monopsony.
In a free market in ideal market conditions, there is equal competition.
This means buyers and sellers will price their goods and services competitively to gain customers.
However, a monopoly happens when a single entity dominates the market and becomes the de facto seller of a particular item or service, tipping the marketplace equilibrium in their favor.
You essentially can’t buy a type of good or service except from that one company.
A monopsony is similar and occurs when a single buyer dominates the sellers’ market. That means you can only sell your goods or services to that company.
In both instances, the economic principles of supply and demand evaporate as the single dominant party has all the bargaining chips to determine the wages and prices and can set terms and conditions of a sale agreement heavily skewed to favor them.
A classic example of a monopoly is the De Beers family, who had the monopoly on the supply of diamonds. They once had 80% of the diamond market and could control the market and the prices. When additional diamond mines were discovered buy other producers, their monopoly position dwindled to about 30% of the market share and forced them to focus on producing more value in other areas of the market.
A very recent example of a monopsony is the European Union’s (EU) position on buying gas from their supplier to power their energy needs for nearly 500 million people and businesses. In an article titled, How to solve Europe’s Russian gas conundrum with a tariff, by Daniel Gros on Mar 30, 2022, he wrote about the European Union having monopsony power over their gas supplier:
Unfortunately for the EU and their energy strategists, they didn’t bank on this supplier being able to find other buyers when threatened with sanctions and price controls. This is an example of the deglobalization trend, globalization vs deglobalization and creating new trade agreements.
Let’s now review some examples of monopolies and monopsonies.
Walmart (NYSE: WMT) is the textbook example of a monopoly, as it dominates the grocery store space. The stats are astonishing: Walmart controls about 72% of all US supercenters and warehouse clubs.
Further, Walmart sells more than 50% of all groceries in 43 metropolitan areas and 160 smaller markets. Its share is at least 70% in 38 of these regions. The company sold $184 billion of groceries in 2018 alone from its 4,700 stores.
Since Walmart commands the low-cost segment, the profit margins are razor thin, killing any incentive for competitors wishing to challenge them.
(NASDAQ: AMZN) Jeff Bezos is the world’s second richest man, thanks to Amazon. On closer scrutiny, it’s easy to see why, as Amazon’s domination of e-commerce has turned it into a monopoly of sorts. For example, Amazon controls 64% of all printed books sold online and 74% of all e-books.
Amazon has not achieved the 50% market share in the e-commerce industry, which explains why the FTC doesn’t consider it a monopoly. However, Amazon indulges and tops in different sectors, which explains why although it only has about a 39% of the overall e-commerce market share, it controls as much as 74% of certain product categories.
Google (NASDAQ: GOOGL) and Facebook control about 64% of online advertising, although Google made three times more revenue than Facebook.
However, nowhere is Google’s dominance more apparent than in online search. Google processes about 80% of all online and 95% of searches on mobile devices.
It’s also the default search engine across multiple web browsers, including the iPhone’s Safari browser. That explains why the Justice Department opened an antitrust lawsuit against Google for allegedly operating like an illegal monopoly.
Walmart (NYSE: WMT) appears in this category as it has dominated the low-cost goods market space, explaining the several antitrust lawsuits against the company. If anything, the company has birthed the “Walmart effect,” as it is both a monopoly and monopsony.
This happens when Walmart arrives in a region and drives out all other low-wage employers, essentially becoming the only low-wage employer in town. That allows the company to drive down employee wages eventually.
Uber (NYSE: UBER) has asserted a stranglehold on the ride-sharing industry, although it has ceded plenty of ground to Lyft. Uber commanded a 69% market share as of 2021, which means drivers have to work with Uber to stand a realistic chance of making headway in that industry.
The NCAA regulates student athletics in the US. All student-athletes have to be members to gain exposure as it’s the only stepping stone they have to the professional leagues.
The NCAA made money off the athletic programs, which means the student-athletes are employees in all but name. For instance, the NCAA generated $1.06 billion in revenue in 2016-2017, with Division 1 men’s basketball generating about 82% of that.
However, the NCAA placed limits on the amount of money students and colleges could make from the tournaments. In 2021, the Supreme Court ruled the benefits cap violated antitrust law. Students will get compensation for image, name, and likeness rights.
While both terms refer to a single business entity dominating a market, monopoly means one company is the only producer of a product or service, while monopsony denotes a single buyer of goods or services. Examples of monopolies include Amazon and Google, while Walmart and Uber are monopsonies.
Burkett, John P., ‘Monopoly and Monopsony Power,’ Microeconomics: Optimization, Experiments, and Behavior (New York, 2006; online edn, Oxford Academic, 3 Oct. 2011), https://doi.org/10.1093/acprof:oso/9780195189629.003.0014, accessed 14 Sept. 2022.
Bivens, J., Mishel, L., & Schmitt, J. (2018). It’s not just monopoly and monopsony: How market power has affected American wages. https://www.epi.org/publication/its-not-just-monopoly-and-monopsony-how-market-power-has-affected-american-wages/.
Boal, W., & Ransom, M. (2002). Monopsony in American labor markets. EH. Net Encyclopedia. https://eh.net/encyclopedia/monopsony-in-american-labor-markets/.
West, E. (2022). Buy Now: Amazon Branded Convenience, Normalizing Monopoly. MIT Press. https://thereader.mitpress.mit.edu/how-amazon-branded-convenience-and-normalized-monopoly/.