Is the US military a monopsony?

Demand monopoly: detailed explanation and examples

Monopsony describes a type of market in an economy in which only one customer (e.g. employer) has many suppliers (e.g. employees). The term was first used in 1933 by the economist Joan Robinson. The term “monopoly of demand”, which is also often understood as a synonym, is misleading as a word, since the ancient Greek expression “monopoly” literally means retail sale. According to a narrow definition, many suppliers have only one customer - a monopsonist.

After a broader exposition, we can also talk about monopsony when consumers can have more influence than usual on the price level. While monopsons are hardly considered real due to their narrow definition, they are much more likely after general determination.

Table of Contents

Monopoly of demand: definition

A monopoly of demand exists when there is only one customer facing many providers. Another (and linguistically more precise) term for demand monopoly is monopsony. What are the consequences of this market situation? Where are there demand monopolies in practice? Consequently, monopoly of demand means that only one buyer of goods or services appears on the market. The buyer determines the price based on the quantity of goods requested. The amount depends on the function of the supply, the nature of which the monopoly of demand cannot influence. However, he will choose the amount necessary to maximize his economic benefit.

Profit maximization in the monopoly of demand

To understand how the monopoly of demand behaves, an assumption can be made: a monopoly buys goods to process and then sells them in a highly competitive market. At Monopsony, a single customer is compared to a delivery function. The offer function determines the price depending on the desired quantity. For normal goods, an increase in the required quantity leads to a price increase. If the monopolist wants to request more units of goods, he has to pay a higher price for all goods in demand.

This means that the marginal costs of a demand monopoly exceed the market price for an additional unit. The maximum profit at Monopsony is when the marginal cost equals the marginal revenue. This means that the price and quantity on the monopsony market are lower than the competitive market.

Oligopoly demand is more realistic

An oligopoly of demand can be observed, but not a monopoly of willingness to buy. This is the case when a large number of suppliers are faced with multiple customers. Corresponding market conditions exist both in the military industry and in road construction as well as in the provision of local transport services. Economists often use the terms monopoly demand or monopoly of limited demand when referring to the oligopoly of demand.

Monopsony or monopoly on demand?

The term “monopoly” comes from the Greek words “monos” (one) and “Polein” (sale). For this reason, the term “post-monopoly” is misleading, which is why many economists and linguists prefer the term “monopsome”. According to this sentence, Oligopsony describes a situation in which few customers meet several suppliers. The name Monopsony is more appropriate because Opsonia means shopping. In the case of texts that are not only intended for the target audience, it is still advisable to talk about the monopoly of demand, as this word, unlike monopsony, is familiar to most people.

Example of a demand monopoly

Since this type of market is quite rare, several examples are available to illustrate monopsony. The state should be mentioned first. Wherever he has a monopoly, for example when printing legal bulletins or other government papers, there is a demand monopoly, as this printing can be carried out by many possible manufacturers. Military products are also only ordered by the state, but are again produced by many producers. However, the military remains the only customer.

Monopoly with limited demand

There is only one customer in this on-demand monopoly; here the number of suppliers is manageable. The state is a monopoly. Examples of a limited monopoly on demand are trains of the Federal Railroad, special vehicles for the police or military equipment.

Differentiation from a monopoly of offers

In contrast to the on-demand monopoly, the supplier has the monopoly on supply. In this form of the market, the provider has a great advantage, as he can freely determine the quantity and prices due to the high demand. From the consumer's point of view, however, the supply monopoly is not very profitable as customers are completely dependent on the supplier's target price. An important feature of this monopoly is that the supplier does not compete with anyone and therefore the price is not determined by supply and demand as usual. Therefore the supplier (monopoly) can use his power and make decisions only under his conditions.

However, caution should be exercised with excessive price expectations - customers can get annoyed. Here, too high a price can be a disadvantage for the supplier. From the point of view of entrepreneurship, a supply monopoly is an ideal market form. This occurs, for example, when a company has a unique product in the market.

Monopoly of demand and profit maximization

However, in order to understand the exact principle of demand monopoly, the premise must be accepted. To resell goods, the monopoly buys them for further processing and then sells them in a competitive market. The supply function that Monopsony encounters as a buyer determines the price of the requested quantity. Therefore, normal products have a higher price. For this reason, if the demand monopoly finds more units of the desired product, it has to pay a higher price for all the goods in demand.

Thus, the marginal costs of a demand monopoly exceed the market price for each additional unit. Profit maximization is found where marginal costs are reasonably available. This means that the volume and price in the monopoly demand market are lower than in the competitive market.

Where are the monopolies of demand?

In theory, such demand monopolies are rare, most of them come from the state. These special monopolies or their variants can be found in the state requirements. This includes, for example, the demand for police forces, as they belong to the state. Let us illustrate this with an example: Apart from other federal states, the police officer in Germany has no other choice because the country makes this job available to him. As a result, the police officer cannot set the price of his services but may or may not accept the price set by the state.

Among other things, the military and armaments industry is often seen as an example of a demand monopoly. Here, too, only the state or the military act as buyers.

However, it is possible that defense companies could also ship their goods to other countries, avoiding a monopoly of demand. However, the state can prohibit this export. For this reason, the state, as a direct buyer, can ban arms exports. As a result, the price and quantity required will decrease. In practice, however, this is rarely the case as states are usually interested in exporting such goods.

The monopoly of demand is relatively surreal

With the exception of governments, the monopoly of demand is in most cases completely surrealistic and non-existent. For example, there is no real monopoly on the demand for police forces or weapons, since the suppliers' goods can be sold not only to domestic but also to foreign buyers. The monopoly of demand is evident for a limited area of ​​movement in rail passenger transport. Suppliers in other countries or transport associations can apply. But even in this case there is no real monopoly of demand.

Where are demand monopolies important?

Demand monopolies are important in factor markets. For example, if in a small town there is only one company that needs workers, the level of the nominal wage rate in equilibrium is determined by the condition that the maximum wage rate = the level of marginal income.

Monopsony and the labor market

The monopsonistic power in the labor market means that wages are below the equilibrium price that would otherwise have arisen in the market, which leads to a loss of wealth. The monopsonistic theory, which in other respects plays a very insignificant role in the economy, provides explanatory power for the influence of the empirically determined minimum wage in some countries, which cannot be adequately reflected in the usual neoclassical model of the labor market. There, after the introduction of the minimum wage, job cuts did not take place to the expected extent.

This is due to the fact that because of monopsony, wages were significantly lower than productivity. Therefore, the majority of the workforce can continue to work profitably despite the forced increase in wages. The reasons for the emergence of the monopsonistic situation are frictions in the labor market. They arise (among other things) from:

  • Ignorance
  • Mobility costs
  • Heterogeneous preferences