11 - Monopsony, Dominant Buyers, and Oligopsony

Summary

Monopsony is the inelegant term that refers to a market in which there is a single buyer (or employer) of a well-specified good or service. Provided that the supply of inputs is positively sloped, the monopsonist may have market power. Profit maximization will lead the monopsonist to depress the price of the input by reducing its purchases, which harms input suppliers and also consumers. Although it is somewhat counterintuitive, this apparent cost saving does not result in lower output prices. In this chapter, we will show how the exercise of monopsony power has deleterious economic effects in both the input market and the output market. We also extend our discussion to dominant buyers and oligopsonists. We observe monopsony in many health insurance markets. Dominant health insurers generally represent a large share of business for health care providers. This allows an insurer to depress reimbursement rates for health care providers by adjusting the quantity of the services that it buys. Those lower reimbursement rates may lead to a reduction in the availability and quality of care for patients.