Monopolist vs Monopsonist

In a previous blog, we discussed the difference between rent seeking and the monopoly power derived from a patent. The harmful aspect of a monopolist comes from the profit maximizing production level. A monopolist will produce where marginal revenue is equal to marginal cost and then charge whatever the market will bear. Since price is higher than marginal cost, we get an allocative inefficiency that we call a dead weight loss. This loss is offset by the benefit to the economy caused by technological change when the monopolist is protected by patent.

A monopolist is a single seller of a product, a monopsonist is a single buyer. When this occurs, the buyer will purchase a quantity where the marginal revenue product equals the marginal resource cost. The buyer will then use its market power to pay what the market will sell at. Since the price will be below the marginal revenue product, we have a dead weight loss similar to what we get in a monopoly.

The Canadian Medical Association and the American Medical Association are monopoly sellers of medical services in Canada and the United States respectively. Insurance companies are rapidly becoming monopsonistic buyers of medical services. When the power of a monopolist meets the power of a monopsonist, the outcome is closer to what we would expect in a competitive market. A July 17th article in the New York Times discusses exactly this situation. (Click here for article)

What happens when a monopolistic seller meets a firm that behaves as if it was a monopsonistic buyer, but doesn’t really have the market power? This is the situation discussed in a Globe and Mail article dated July 22. (Click here for article) Sears has been pressuring its suppliers to reduce their prices due to the weaker US dollar (stronger Canadian dollar). Unfortunately for Sears, they are not a monopsonistic buyer of cosmetics while Chanel is a monopoly in their lines. In this case, the market power lies with the monopolist. Chanel has refused to reduce the price at which they sell to Sears and is pulling all of their products from Sears stores across Canada.