An oligopsony is a market situation where there are few large buyers and many sellers, allowing buyers to dictate market prices and conditions to sellers. Cocoa is an example of oligopsony. New buyers may enter the market, but there are barriers to entry. The government may take action if there are antitrust issues or offer regulatory or price protections to sellers.
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 some sellers and many buyers. In cases where oligopsony exists, the potential exists for buyers to dictate market prices and other conditions to sellers because sellers must find an outlet for their product.
An example of oligopsony is with the product known as cocoa. Although there are many products that use cocoa, there are few major buyers of the crop. These buyers can dictate to cocoa farmers what price they will pay for the product, because there are very few opportunities to sell the product outside of these major buyers. Therefore, the livelihood of the producer depends on the sale of the product.
In situations where there is an oligopsony, several things can happen. The first is that there is likely to be a bit of a disincentive for more producers or sellers of the same product to go into business, especially if buyers are seen as taking advantage of the situation. Second, it can help keep prices down for consumers because these buyers buy in bulk and have more control over the terms of purchase.
Unlike an oligopoly, there may also be the potential for new buyers from time to time. In fact, if conditions become favorable for buyers, new companies can be created to take advantage of those conditions. Therefore, an oligopsony may not last long, even after its creation, if the conditions are ripe for its exploitation. In such situations, oligopsony may have the potential to foster even greater competition among buyers as others enter the market.
However, in general, there are some barriers for new buyers in an oligopsony. The product that is bought and sold may require special processing and knowledge as it goes from a raw material to a finished product. This may be one of the reasons why there isn’t a larger buyer base in the first place. In addition, new buyers may find that producers or sellers have existing contracts with established buyers, and are unable to sell to them under the terms of those contracts.
Unlike oligopolies or monopolies, an oligopsony can be somewhat more difficult to regulate because the government cannot force individuals or companies for a product, in most cases. If there is an antitrust issue, such as contracts that prohibit sellers from seeking other buyers, that may be one course of action the government can take. Additionally, the government may offer some regulatory or price protections to sellers, if conditions threaten their livelihoods.
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