Monopoly vs Monopsony: What’s the Difference?

A monopoly and a monopsony signify conditions of imperfect competition, where a single entity influences a free market that should operate under the laws of supply and demand. An individual seller controls a market monopoly, while a single buyer dominates a market monopsony.

Monopoly

A monopoly exists when a single entity is the sole provider of a particular asset or service. Monopolies are a form of extreme free-market capitalism in that, absent any restriction or restraints, a single individual, company, or group becomes large enough to own all or nearly all of the supply of goods, commodities, facilities, amenities, or support systems.

Monopolies effectively eliminate economic competition for a particular good, including possible substitutes. Other firms cannot enter the market. Monopolies also prevent external influences on the selling price for goods or services. In this way, they circumvent the natural economic laws of supply and demand. A monopolistic company can set prices and change them for any reason, resulting in higher profits than if it had competition.

Monopsony

A monopsony controls the market through which specific goods or services are purchased. Monopsonies arise when individuals, corporate groups, or other entities position themselves as the sole purchasers for a particular good or service. A monopsonistic company uses competition among suppliers or wholesalers to its advantage, driving down the selling or asking price for the given good or service.

Monopsony is seen in labor markets when a single employer has an advantage over the workforce. When this happens, the suppliers—in this case, the potential employees—agree to a lower wage because of factors resulting from the buying company’s control. This wage control drives down the cost to the employer and increases profit margins.

Anti-Competition Examples

Walmart, known for its high-growth business model, has been called a monopsony of the discount retail market as the primary buyer for low-cost goods. Walmart’s tendency to swallow or outpace its competitors has affected the supplier markets.

The so-called “Walmart effect” may keep employee productivity high and consumer prices low, but can reduce wages and competition. Often, the arrival of a Walmart in a region drives out other retail businesses, so Walmart becomes the only employer in the town for unskilled or semi-skilled workers, which allows it to set wages and benefits.

In 2023, the Federal Trade Commission and multiple state attorneys sued Amazon.com, Inc. for monopolistic activity. The lawsuit claimed Amazon’s structure prevents rivals and sellers from lowering prices, degrades product quality, overcharges sellers, stifles innovation, and thwarts competition.

The Bottom Line

Monopolies and monopsonies affect the free market, supply and demand, and a consumer’s choices. The Federal Trade Commission implements regulations through antitrust legislation to discourage companies from cornering the market for products or services.