Oligopsony

Oligosony is a Market Form in which the number of buyers is small while number of sellers in theory could be large. This typically happens in a market where numerous suppliers are competing to sell their product to a small number of (often large & powerful) buyers. This allows buyers to exert a great deal of control over the sellers and can effectively drive down prices.

An Oligopsony is a form of imperfect competition. It contrasts with Oligopoly, where there are many buyers but few sellers. However, Oligopsony tends to be just as prevalent in the real world.

In fact, the firms operating as Oligopoly in an output market, also often operate as Oligopsony in an input market. Most of the standard analysis that applies to the Oligopoly also applies to the Oligopsony. When a small number of relatively large buyers dominate an industry , they tend to dominate most facets of the industry.

The reason that the term Oligopsony is seldom used is that term Oligopoly usually covers the entire range of output selling and input buying activities. For example, if few firms dominate the output market for computers as Oligopoly sellers, than they are also likely to dominate the input market for computer components, such as silicon chips, hard disc drives, and programmers, as Oligopsony buyers. If a few firms are Oligopoly sellers of gasoline, then they are also likely to be Oligopsony buyers of petroleum.

Key Characteristics of Oligopsony Competition

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 depending on the number and the size of the buyers.

For example only a three American firms (Cargill, Archer Daniels Midland & Barry Callebaut) buy the vast majority of world's cocoa bean production, mostly from small farmers.

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. They anticipate the moves of other buyers in the industry to woo the sellers, and try to reciprocate with their own strategies.

Rigid Prices

Many Oligopsonistic industries tend to keep their prices they pay to sellers relatively constant, preferring to compete in ways that do not involve changing the price. The reason for this that the competitors are likely to match price increases, but not price decreases, which may result in loss of the market share to that buyer, as the sellers will sell the raw materials to highest bidder only.

Non Price Competition

Because Oligopsonistic buyers have little to gain through price competition, they generally rely on non price methods of competition. Oligopsonistic  employers for example are likely to compete through working conditions, fringe benefits and assorted non wage 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 secretly agree to control prices, purchasing, or other aspects of the market. By colluding they can behave as a Monopsony. As such they can set Monopsony prices & conditions.

Barriers to Entry

Firms in a Oligopsony market attain & retain market control through barriers to entry. Natural barriers to entry includes, patents, resource ownership, government franchises, start up costs, brand name recognition. Artificial barriers to entry include decreasing average costs by collusion or mergers. Each of this make it extremely difficult for potential competitors to enter the market.