Oligopolies and Oligopsonies
An oligopoly occurs when there are only a few sellers in the market. An oligopsony (its a technical term from economics) happens when are only a few buyers in the market. As oligopolies grow, so do oligopsonies.
Weve already mentioned a major oligopsony, the limited number of national book chains. Basically, the success or failure of any book depends on how it does at Borders, Barnes & Nobles, and Amazon. Other bookstores hardly matter. Needless to say, this puts those companies (that “buy books”) in a very strong bargaining position in relation to book publishers. Those three can dictate terms and determine rates.
The potato market works similarly. The biggest buyer of potatoes in the world (through middlemen) is McDonalds, followed by Burger King and Wendys. There are other buyers of course, but these three determine the overall demand, the type of potato wanted, the price theyll be willing to pay, and the time of delivery. The rest of the market, is by comparison, small potatoes.
Similarly all food manufacturers are increasingly being bossed around by an oligopsony of supermarkets. Whatever Wal-Mart, Kroger, Safeway and a few others demand, youd better supply, whether it is fees, onsite help, co-op advertising. This set of expectations shows up the weakness of small producers, who dont have the resources to meet these requirements, or to go toe-to-toe with the biggest chains.
The best way to counter an oligopsony is with an oligopoly. Proctor and Gamble or Unilever can, to some extent, stand up against Wal-Mart or Walgreens. Smaller companies havent a chance. And by the same token, oligopsonies are formed to fight the power of oligopolies. Safeway can interact as a peer with Nestle or Kraft, while the local grocery market cannot.
Most oligopsonies are in turn oligopolies. The big chains are oligopsonies with regard to the manufacturers, but oligopolies to the customers. The cable operators are becoming an oligopsony to the oligopoly of TV channel owners to their subscribers, theyre local monopolies. National radio chains like ClearChannel and Viacom operate the same way.
Of course, not all industries are in the hands of two or three major players. But in almost every imaginable industry, there are fewer players than there were ten years ago. Industries that had 10 major players now have six, those that had six now have three leading firms. [Oligopoly Watch]