Assessing the Importance of Oligopsony Power in Agricultural Markets

Abstract

Oligopoly, competition among few sellers, is the cornerstone of industrial organization (IO). Conversely, its sister concept, oligopsony, competition among few buyers, is scarcely mentioned. For example, oligopsony is not discussed in the entire two volume Handbook of Industrial Organization, and monopsony is mentioned only in the context of incentives to integrate vertically. Two reasons apparently account for IO economists' lack of interest in buyer market power: (i) they don't think it's very important, and (ii) they don't believe it presents any unique modeling issues relative to seller market power. Scherer and Ross illustrate this first viewpoint, arguing that average on the buyers' side in manufacturing is undoubtedly lower than seller concentration (p. 519). Tirole, in his masterful treatise on IO theory, illustrates the second, dispatching monopsony power in one sentence: Naturally the conclusions [regarding monopoly power] would also hold as well for monopsony power... (p. 65). We argue that this dismissive treatment of buyer market power is not reasonable for economists interested in agriculture and agricultural markets. The Scherer and Ross viewpoint may apply when considering generic inputs such as labor, capital, and energy. Competition for these inputs is apt to exceed competition for the outputs they produce because firms cross product market boundaries to compete for these inputs, and there is essentially no branding among input buyers to diminish price competition among them. Moreover, these inputs are typically mobile, hence, in elastic supply to individual buyers, limiting the exercise of oligopsony power even in geographic settings where relatively few buyers prevail. This view of input markets does not apply, however, to first-handler markets for the raw agricultural commodities that are inputs into the processed or fresh-packed food products.' We identify the following distinctive structural characteristics of these markets: