Oligopsony: An Overview
Let me explain what an oligopsony is—it's a market for a product or service dominated by just a few large buyers. This concentration of demand gives those buyers substantial power over sellers, allowing them to keep prices down effectively.
You can see the opposite in an oligopoly, where a few sellers dominate the market and keep prices high due to limited competition from other suppliers.
Understanding the Oligopsony
Take the fast-food industry as a clear example of an oligopsony. A handful of big players like McDonald's, Burger King, and Wendy's purchase a massive amount of meat from American ranchers, giving them the leverage to dictate the prices they're willing to pay.
Cocoa provides a less obvious case. Three firms—Cargill, Archer Daniels Midland, and Barry Callebaut—buy most of the world's cocoa beans, which come mainly from small farmers in developing countries.
American tobacco growers face a similar setup with cigarette makers. Three companies, including Altria, Brown & Williamson, and Lorillard Tobacco Company, purchase nearly 90% of U.S.-grown tobacco, supplementing it with imports.
Key Takeaways
- An oligopsony concentrates the market for a product in the hands of a few big players.
- The buyers dominate the market, keeping prices down and wielding considerable influence over the industry.
- The supermarket industry is emerging as an oligopsony with global reach.
The Publishing Oligopsony
In American book publishing, consolidation has resulted in just five dominant publishers, known as the Big Five, which account for about two-thirds of all books published.
This isn't always obvious to you as a reader. Each giant has absorbed or created specialized imprints that target different segments, often using names of former independent publishers.
These imprints give the illusion of many publishers, but they coordinate within the parent company to avoid competing internally for manuscripts from popular authors.
This oligopsony depresses advances paid to authors and pressures them to align with the publishers' tastes.
Important Impacts
Producers in an oligopsony can get trapped in a 'race to the bottom,' affecting both prices and quality.
In recent years, supermarkets have started forming an oligopsony. The largest is Kroger, operating chains like Dillons, Pay-Less Super Markets, Ralphs, and City Market, among others. Aldi Nord, a German company, owns Aldi and Trader Joe's.
This emerging oligopsony extends to developed economies worldwide. As a result, these buyers influence not just prices but also what crops are grown, how they're processed, and how they're packaged.
The effects reach deep into the lives of agricultural workers globally. Their power has forced many suppliers out of business, and in some countries, this has led to allegations of unethical and illegal conduct.
Oligopoly vs. Oligopsony
In an oligopoly, control lies with a few sellers. If they hold firm on prices, buyers have little room to negotiate.
An oligopsony market often sees price wars as sellers compete to attract buyers, driving prices down and quantities up.
Getting caught in an oligopsony means sellers lose control over supply and demand, leading to that 'race to the bottom.'
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