What is an Oligopsony?

An oligopsony is a market in which only a few buyers purchase all of an industry's output.

How Does an Oligopsony Work?

Let's assume that Company XYZ, Company ABC and Company 123 buy 95% of the country's carrots. If Company XYZ lowers the price it will pay for carrots, producers may choose to sell to Company ABC and Company 123 instead. But if Company ABC and Company 123 instead decide to follow Company XYZ's lead and pay less, the three companies can essentially control almost the entire carrot market through their power to maintain market stability and pay lower prices.

Why Does an Oligopsony Matter?

As you can see, buyers exert tremendous power over sellers in an oligopsony because producers have so few customers. Buyers in an oligopsony are keenly interested in what the other buyers do next -- they are torn between increasing profits and trying to gain competitive advantage. In turn, they can drive down prices.