Monopsony

I realize that I used the term "monopsony" the other day.

At the risk of sounding pedantic, a monopoly is a market situation where there is only one seller. When there is only one seller, there is no price control over what the seller can charge and the seller maintains all bargaining power.

A monopsony is a market situation where there is only one buyer. In that situation, the buyer retains all of the bargaining power and can drive the price down.

By way of example, IPL is a monopoly. We don't have the choice to buy electricity from anywhere else. Were IPL unregulated, it could charge 10X what it currently does for electricity. What are we, the buyer, going to do? Go without?

Contrarily, Amazon and WalMart are often considered monopsonies (though they are not TRUE monopsonies, in that there are other retailers who might buy from their suppliers, but they still retain enormous bargaining/market power). If a factory that makes plastic sleds decides to raise the price on WalMart, they go to a different factory and undercut the first one. WalMart and Amazon, if not the sole purchasers of a particular good (you name it . . . windshield wipers, rubber gloves, light bulbs, etc.) from their suppliers, retain enormous bargaining power. WalMart or Amazon can easily tell Factory X, "If you raise the price on your widget, we'll buy the widget from Factory Y." As long as Factory X doesn't go out of business, this works swimmingly for WalMart or Amazon.

Just think of it this way: Is it easier to sell water in the Sahara Desert when you're the only seller, or in the middle of a lake full of fresh water where there are 1,000 other vendors selling water? Who has the bargaining power in each situation?

Market power matters.