Definitions Deconstructed

Monopoly vs. Monopsony

S. G. Lacey

Definition:

Monopoly = An organization or group that has complete control of something, especially an area of business, so that others have no share.

Monopsony = A market situation in which there is only one buyer for goods or services offered by several sellers. [REF]

Deconstruction:
This pair of economic terms are diametric opposites of each other. While the first term is much more common in modern lexicon, likely a result of being the title for one of the most popular board games in the world, with over 275 million copies sold, the latter word is equally important.

Obviously, in both cases, this scenario can lead to drastic pricing power wielded by a single entity. The classic rules of supply and demand, one of the core tenants of economics, inevitably come into play.

The key distinction from a business standpoint is seller-controlled supply in a monopoly, and buyer-controlled demand in a monopsony. Both circumstances represent imperfect competition, where a lone player has the ability to influence the free market.

In a monopoly situation, with just one provider of product, that company can restrict production, thereby starving the market, and driving prices up. Making higher profit margins, while needing to produce fewer goods, is a valuable tactic for increasing revenue. A cutthroat, but understandable, enterprising activity.

In contrast, for a monopsony, there’s a single entity driving demand across an entire industry. The market outcome here is a little less predictable. Assuming a large supply of manufacturers, all competing for sales, product values in this situation should come down. However, if the monopsony operation is not able to modulate need, or is potentially even price insensitive, then costs could remain high, despite being the only purchasing company.

From a word origin standpoint, the modern prefix “mono”, derived from “mónos” in Greek, is obvious. Regardless of letters and accents, the “single” meaning is linked to the lone dominant force in the market imposed by both manipulative business practices.

Delving deeper provides more context; the Latin “monopolium”, clearly similar in spelling, translates directly to “right of exclusive sale”. Even more interesting is the French phrase “monopole”, literally meaning “possession of something to the exclusion of others”. In olden times, this European identifier was utilized in the context of owning people as often as products.

The modern monopsony spelling leverages another Greek word, “opsōnía”, which means “to purchase”, creating a very literal pairing. While this concept has been around since the olden days of agrarian overlords, the current monopsony verbiage wasn’t coined until a 1933 treatise penned by British economist Joan Robinson.

In a similar vein, these economic terms can also have the “mono” prefix switched out for “oligo”, thus representing a slightly less dominant situation, where a few key entities control a given market.

Both monopoly and monopsony tactics are generally considered illegal in a free market system, due to the high profits and increased pricing power which is enabled.

However, a monopoly can actually be considered an extreme outcome of unfettered capitalism. The most effective and efficient player is able to take over the entire space, often due to economies of scale. Thus, not all monopolies are bad, assuming the company in charge doesn’t leverage their substantial costing control.

Regulated monopolies end up with fixed pricing, which limits corporate power. In contrast, unregulated monopolies can be much more manipulative. Also, natural monopolies can occur over time as manufacturing matures, especially in industries where fixed investment cost are high relative to variable resource inputs.

In contrast, monopsony conditions involve being the sole purchaser of a good or service. This tends to occur in labor markets where a lone employee dominates the entire workforce. Such leverage allows for substantially lower wages to be paid, benefiting a corporation’s bottom line.

There’s lots of research regarding the influence of monopsonies on employment dynamics. In the theoretical realm, it’s easy to generate a simple X-Y graph of labor and wages, showing how a single proprietor can shift the paid salary dynamics. Counterintuitively, many economists suggest that setting minimum wages in a monopsony-like environment can even further hinder menial workers’ compensation.

There’s a specific American company that allows this pair of economic terms to simultaneously be explored in more detail. Walmart, which exhibits elements of both a monopoly and monopsony, at both the local and national scale.

Being the primary domestic vendor for low-cost goods, often emanating from Asia, and purchase volumes, through economies of scale, makes Walmart a monopsony for certain products. Impressive domestic dominance, considering the massive amount of cheap trinkets produced in China.

In addition, when opening a new store in small towns, Walmart often forces small mom-and-pop shops to close, leveraging its cheaper product prices achieved through coordinated logistics and corporate synergies. This results in them being the only employer in town for entry-level retail jobs, thus providing another avenue for monopsony control.

Meanwhile, a monopoly is created, as local consumers are now forced to shop at Walmart, since this is the only remaining outlet where staple goods can be purchased. This exclusivity is especially prevalent in rural towns where shopping locations are limited, and travel distances lengthy. It’s hard to blame consumers who choose a one-stop-shop in this circumstance.

Walmart’s high-growth business model, driven by the need to fuel increasingly bold stock market metrics, facilitates both the monopoly and monopsony elements. Which is why this American corporate behemoth has been the target of numerous U.S. federal government anti-trust lawsuits over the years.

Throughout history, in all manner of business environments, both monopolies and monopsonies have existed. However, there are specific industries which lend themselves to such corporate concentration.

One of the most infamous monopolies in history was Standard Oil, a brainchild of business magnate John D. Rockefeller. Founded in the already competitive petroleum industry in 1870, within 2 years this Cleveland, OH based company had gone on a major acquisition spree, acquiring or bankrupting 22 of their 26 competitors.

As a result, by the start of the 20th century, Mr. Rockefeller owned more that 90% of the country’s gas drilling, refining, and distribution market. An effective entrepreneurial ploy, which allowed Standard Oil to control the market, and dictate prices. Thus, the company’s founder became America’s first billionaire.

Via a landmark U.S. Supreme Court ruling in 1911, Standard Oil was forced to break up into over 30 separate entities. While many of these firms remain relevant in the hydrocarbon space to this day, there’s no single player which commands as much clout as Standard Oil did during its prime.

Monopolies tend to materialize in manufacturing scenarios where the underlying inputs are scarce, or the means of production technically challenging. De Beers’ diamonds. YKK’s zippers. AB InBev’s beers. Luxottica’s glasses.

Some sectors are so prone to monopoly formation that they often become government regulated, through legislation, if not specifically mandated.

In America, railroads and utilities are two infrastructure systems which are so vital that private competition can’t be tolerated. Hence, President Teddy Roosevelt’s antitrust crusade via the Interstate Commerce Act of 1887, and forced breakup of the American Telephone and Telegraph company’s dominant Bell System in 1982.

Recent decades have ushered in a whole new world of monopolies, is one specific space. The information technology realm. These corporations, while huge in size, often fly under the radar with regards to regulation.

Google. Facebook. Microsoft. Apple. All digital products which are seamless and ubiquitous in everyday life. Monopolies rely on relentless consumer demand, often bordering on addiction. Check and check.

Single supplier dynamics are not always detrimental. In the short term, mega conglomerates can benefit the consumer, by passing along price savings, on a wide variety of goods and services. However, once the customer is hooked, trusting, or reliant on online offerings, these corporations can leverage their dependency to increase profits.

While monopoly tactics are fairly easy to spot and counteract, monopsony practices in the modern business landscape are a little more muddled and controversial. Again, the technology industry comes under scrutiny.

Early-stage venture companies often sell their offerings to consumers at a loss. The hope with this strategy is that gaining market share can allow the operation to gain a critical mass of users, which will lead to profitability. For such start-ups, and their intrepid investors, metrics like DAU and TAM are much more important to investors than actually turning a profit.

Also, marketing is also a huge part of revenue for many online operations. Which is why products like Instagram, SnapChat, and TikTok are free of charge to use. This leads to the classic industry line, “if you don’t know what the product is, you are the product”.

It’s not just the digital realm where monopolistic practices are being wielded. Incredibly cheap goods on Amazon. Absurdly low rides from Uber. Low-cost, high-end, rentals via AirBnB. All these examples of below-market pricing are enabled by ancillary corporate goals, beyond purely generating a profit through sale of their primary pedaled wares.

Obviously, companies can’t operate at a loss indefinitely, especially once they enter the public market. However, as long as interest rates stay low, and investment appetite remains strong, firms can continue to burn cash in an effort to grow. Counterintuitively, the monopsonistic nature of the tech world leads to lower cost for users. At least in the short term.

However, in recent years, further scrutiny has been applied these technology behemoths. The U.S. Federal Trade Commission has taken aggressive action towards may social media players, though has yet to significantly change their bold business practices or substantial societal impact.

This is clearly an example of a market which is not self-leveling, as would be expected with true capitalism. There are many other variables, most notably transactional costs, and political posturing, that limit free flow of products and services for the greater good.

Laisse-faire economics, of the same language origin as the term “monopoly”, clearly has its pros and cons. Ruthless capitalism in modern America has taken competition to its logical endpoint. As inflation rears its ugly head throughout the nation for the first time in over 4 decades, greedy monopolistic business practices have reemerged in public consciousness, from used cars to grocery staples.

There’s one aspect of the American economy where both monopoly and monopsony come into play due to forces outside standard capitalism. What entity could be so powerful that it can distort the simple laws of supply and demand across the entire market? That influential juggernaut would be the United States governmental complex.

One needs only to look at a few sectors that are repeatedly in the news for various political reasons to see this rampant manipulation.

Defense spending, where the number of suppliers is limited, government coffers essentially bottomless, and projects perpetually run over budget. Healthcare, now mandated under the ACA, which manipulates pricing, resulting in large premiums and profits for prioritized providers. College education, with student loans so prevalent that universities can essentially charge whatever they want, with very little auditing of the learned knowledge provided.

Clearly, by creating artificial demand via huge fiscal infusions, and hindering available supply through preferential producers, the U.S. federal administration has enabled both monopoly and monopsony dynamics in industries that would function much more smoothly utilizing unfettered free-market capitalism.

In the future, it will be interesting to see how growing monopolistic and monopsonistic practices shape the average American’s economic experience. Will more government intervention be required to protect the public, or can private sector competition keep commerce fair? Only time will tell.

Details:

Overarching comparison of monopoly vs. monopsony practices. [REF]
Thorough list of monopoly examples over time. [REF]
Detailed breakdown of monopsony dynamics within the labor sector including lots of graphs. [REF]
Examples of current monopsonies throughout the U.S. tech industry. [REF]