An oligopsony is a situation in which there are a few large buyers and perhaps many sellers. In that case, the situation is reversed from an oligopoly, where there are a few sellers and many buyers. In cases where an oligopsony exists, there is the potential for the buyers to dictate market prices and other conditions to the sellers because the sellers must find an outlet for their product.
One example of an oligopsony is with the product known as cocoa. Though there are many products that use cocoa, there are few major buyers of the crop. These buyers can dictate to cocoa growers what price they are going to pay for the product, because there is very little other opportunity to sell the product outside of these major purchasers. Thus, the livelihood of the producer depends on selling the product.
In situations where an oligopsony exists, a number of things may result. The first is that there is likely some discouragement for more producers or sellers of the same product to get into the business, especially if the buyers are seen as taking advantage of the situation. Second, it may help keep prices down for consumers because these buyers purchase in bulk and have more control of the purchase conditions.
Unlike an oligopoly, there may also be the potential for new buyers from time to time. In fact, if the conditions become favorable to the buyers, new companies may be created to take advantage of those conditions. Therefore, an oligopsony may not last very long, even after it is created, if the conditions are ripe for exploitation. In such situations, the oligopsony may have the potential to foster even greater competition among buyers as others get into the marketplace.
Generally, though, there are some barriers to new buyers in an oligopsony. The product being bought and sold may require special processing and knowledge as it moves from a raw material to a finished product. This may be one of the reasons why there is not a larger base of buyers in the first place. Also, new buyers may find that producers or sellers have existing contracts with established buyers, and are not able to sell to them under the terms of those contracts.
Unlike oligopolies or monopolies, an oligopsony may be somewhat harder to regulate because the government cannot mandate individuals or companies by a product, in most cases. If there is an anti-trust issue, such as contracts prohibiting sellers from seeking out other buyers, that may be an avenue of action the government can take. Further, the government may offer some price or regulatory protections to sellers, if conditions threaten their livelihoods.
