Oligopsony

From CEOpedia | Management online

Oligopsony is an economic market structure where there are only a few buyers in the market compared to the number of sellers. This allows the buyers to have more power in the market and dictate the terms of the transaction. For example, they can often lower the price they are willing to pay for a product, or set stricter requirements for the quality of the product they are buying. * It also allows them to have more control over the terms of the contract, such as the length of the contract, the delivery schedule, and the payment terms. * It also gives the buyers more control over the suppliers, as they can choose to switch suppliers if the current supplier does not meet their needs. * Additionally, the buyers can often receive better deals from the suppliers due to their market power.

Example of Oligopsony

One example of oligopsony is the agricultural market in the United States. Here, there are only a few large companies that buy the majority of the agricultural products from the farmers.

  • These companies can then dictate the terms of the sale, such as the price they are willing to pay, the quality of the product, and the length of the contract.
  • This allows them to have more control over the agricultural market, which can have a large impact on the farmers and their income.
  • Additionally, these companies are often able to negotiate better deals from the farmers due to their market power.

When to use Oligopsony

Oligopsony is most often used when there are only a few buyers in the market who have a very large demand for the product. This allows them to have more leverage in negotiations with suppliers and receive more favorable terms. Additionally, it can be used when the buyers are looking for a specific product or service and there are only a few suppliers that can provide it. Finally, oligopsony can be used when the buyers want to ensure a consistent supply of the product or service, as they can lock in long-term contracts with the suppliers.

Steps of Oligopsony

The steps of oligopsony include the buyers setting the terms of the transaction, controlling the terms of the contract, having control over the suppliers, and receiving better deals from the suppliers due to their market power.

  • The first step is for the buyers to set the terms of the transaction, such as the price, quality, and delivery terms.
  • The second step is for the buyers to control the terms of the contract, such as the length of the contract, the delivery schedule, and the payment terms.
  • The third step is for the buyers to have control over the suppliers, as they can choose to switch suppliers if the current supplier does not meet their needs.
  • The fourth step is for the buyers to receive better deals from the suppliers due to their market power.

Advantages of Oligopsony

The main advantage of oligopsony is that it can lead to lower prices for buyers, as the buyers have more power to dictate the terms of the transaction.

  • This is because the buyers can use their market power to force lower prices from the suppliers.
  • Additionally, due to the small number of buyers, the suppliers may be more willing to negotiate on the terms of the transaction.
  • This can lead to better deals for the buyers in terms of the length of the contract, delivery schedule, and payment terms.

Limitations of Oligopsony

The main limitation of oligopsony is that it can lead to higher prices for consumers. Since the buyers have more power in the market, they are able to set the prices for the products and services they are buying, and this can lead to higher prices for the consumer.

  • Additionally, since there are fewer buyers in the market, the suppliers may have less incentive to innovate and create better products, as they have less competition to keep them on their toes.
  • Also, since the buyers have more power, they may be able to take advantage of the suppliers and demand lower prices than they would be able to get in a more competitive market.

Other approaches related to Oligopsony

Oligopsony has a few related approaches that focus on the power of the buyers in the market. One of these approaches is the buyer-seller model, where the buyers are assumed to have market power and can influence the market by dictating the terms of the transaction. Another approach is the game theory approach, which looks at the strategic decisions that buyers and sellers make in order to maximize their profits. Finally, the pricing model approach looks at how the buyers and sellers set their prices in order to maximize their profits.


Oligopsony — recommended articles
Price-Taker — Price war — Tying arrangement — Law of supply and demand — Types of procurement — Monopolistic competition — Diminishing marginal utility — Price Maker — Bilateral monopoly

References

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