Oligopsony

What is oligopsony?

Oligopsony, also known as demand oligopsony, is an imperfectly competitive market model in which there are few applicants (buyers) but several suppliers (sellers).

This term comes from the Greek words oligo, which means "little", and psonium, which means "buy." Within the oligopsony it is the buyers who assume the power and control over the purchasing conditions and market prices.

Oligopsony characteristics

Among the main characteristics of oligopsony we can highlight that:

• It is developed in a market of imperfect competition, since buyers are the ones who exercise power over market conditions.
• Companies are connected, therefore the policies that each one of them exerts directly influence the others.
• This market model occurs only with homogeneous products.
• Firms make sure that the market cost stipulated between them provides them with a lot of profit but is not an incentive to attract new skills to the market.

Advantages and disadvantages of oligopsony

Oligopsony has both advantages and disadvantages.

Advantage

The advantages observed in oligopsony are the following:

• The buyers have the power to set costs of the products.
• On the demand side there is no competition, since its dominance within the market is absolute.
• It is not necessary to hire as many staff.
• it's possible get any number of products without this influencing the established price.
• The greater the flexibility of a product offering, the less the effect on its price.

Disadvantages

The disadvantages found in oligopsony are the following:

• Who sell products they do not have the ability to assign conditions on them.
• The products or goods must conform to the demands of the plaintiffs or buyers.
• To the decrease surplus manufacturers and not being able to compensate, there may be efficiency losses.
• If there are a large number of sellers and single buyer a extreme loss situation.

Examples of oligopsony

Not all people can buy a plane, only the great magnates, governments of nations or businessmen they have the purchasing power to obtain this kind of transportation. For this reason, the amount of aircraft buyers is quite small, which forces sellers to be flexible in their sale so as not to lose it to the competition.

Another example is the cinemas. Inside the cinemas we observe unique installations that allow the projection of films, for example, a giant screen. Manufacturers of this class of screens have a small number of buyers, therefore they operate on an oligopsony.