A monopsony is a market structure where a single buyer dominates the purchasing of goods or services. While monopoly refers to a single seller controlling the market, monopsony describes a situation where one buyer has sufficient power to influence the price it pays suppliers.
Monopsony power allows a buyer to push prices down below the competitive level, potentially reducing supplier profits and discouraging new entrants. At the same time, monopsony can create efficiency gains for consumers if the buyer passes on lower costs in the form of cheaper final goods or services.
Dominant buyer: One organisation or firm accounts for a very high share of purchases.
Price-making ability: The monopsonist can negotiate lower prices from suppliers, as they have few alternative buyers.
Reduced supplier power: Suppliers become dependent on the monopsonist. Their profits and investment may be squeezed.
Potential benefits for consumers: Lower input costs can reduce prices or improve affordability of the final good/service.
Risk of inefficiency: Suppliers may cut back on innovation, quality, or supply if prices are driven down too far.
In a competitive product market:
Suppliers sell where supply meets demand.
Prices are higher and output is greater than under monopsony.
In monopsony:
The buyer sets a lower price and purchases less than the competitive equilibrium.
This creates a transfer of welfare from suppliers to the buyer.
If cost savings are passed on, consumers may benefit; if not, the buyer simply increases profit margins.
The UK National Health Service (NHS) is often cited as a real-world example of monopsony power in product markets.
The NHS is the largest purchaser of healthcare goods and services in the UK, including pharmaceuticals, medical equipment, and private-sector treatments.
Because the NHS buys in such large volumes, it wields considerable bargaining power against suppliers.
Pharmaceuticals
The NHS uses its purchasing power to negotiate lower drug prices with pharmaceutical companies.
Agencies like NICE (National Institute for Health and Care Excellence) assess whether treatments are cost-effective, strengthening monopsony control.
This can lead to significantly cheaper medicines compared to countries without a single national buyer.
Medical Equipment and Supplies
The NHS Procurement Service bulk-buys items such as PPE, MRI scanners, and hospital beds.
Large-scale contracts allow suppliers to benefit from economies of scale, but also mean they are highly dependent on winning NHS tenders.
Private Healthcare Providers
The NHS occasionally outsources treatments (e.g., cataract operations, diagnostics) to private hospitals.
As the main buyer, the NHS sets terms and limits how much providers can charge.
Lower input costs save taxpayers money.
Standardised purchasing ensures equal access to treatments across the UK.
Bulk buying provides stability and guaranteed demand for suppliers.
Suppliers may earn lower profits, discouraging innovation in pharmaceuticals or medical technology.=
Risk of “supplier exit” if firms cannot sustain low margins.
Dependence on a single buyer gives the NHS strong control but can make negotiations slow and bureaucratic.
Global companies sometimes prioritise launching new drugs in countries with higher prices, delaying UK availability.
Monopsony power in product markets occurs when a dominant buyer can dictate prices and terms to suppliers. The NHS illustrates this clearly: its purchasing power drives down costs for medicines and equipment, benefiting taxpayers and patients. However, excessive monopsony power can discourage innovation, delay access to new treatments, and create long-term inefficiencies in supply.
Exam tip: When evaluating monopsony, balance the benefits of lower costs for consumers (in this case, patients and taxpayers) with the drawbacks of reduced supplier incentives. Use the NHS case study to strengthen analysis in essays.