In economics, a monopsony
is a market form in which only one buyer faces many sellers. It is an example
of imperfect competition, similar to a monopoly, in which only one seller faces
many buyers. As the only purchaser of a good or service, the monopsonist may
dictate terms to its suppliers in the same manner that a monopolist controls
the market for its buyers
It has been argued that
Wal-Mart, in the United
States, functions as a monopsony in certain
market segments, as its buying power for a given item may dwarf the remaining
market. This allows it to pressure suppliers into selling products at preferred
rates.
This is probably the strategy
the government was hoping to follow with its National Shipbuilding Procurement Strategy
(NSPS). For large ship construction, Canada has establish a strategic
relationship with two Canadian shipyards, selected through an open and fair
national competition, and designated them as sources of supply, one for combat
vessels and the other for non-combat vessels. It is likely that the government
hoped that functioning as a monopsony would leave them in a position which
would allow them to keep costs down.
It should be noted that another
example of a monopsony is a single-payer universal health care system, in which
the government is the only "buyer" of health care services. The inability
of governments to find cost savings in the health care system is well documented
and this alone should have given the government pause.
On October 19, 2011, the NSPS
Secretariat announced the two Canadian shipyards that were selected to
rebuild the Canadian fleets. Irving Shipbuilding Inc. was selected to build the
combat vessels while Vancouver Shipyards Co. Ltd. will build the non-combat
vessels. The total value of both projects is $33 billion; the projects will
span 20 to 30 years. This represents the largest procurement sourcing
arrangement in Canadian history.
It also created a bilateral monopoly. In a bilateral monopoly there is both a monopoly (a
single seller) and monopsony (a single buyer) in the same market. In such,
market price and output will be determined by forces like bargaining power of
both buyer and seller.
In one example a bilateral
monopoly exists in the market for nuclear-powered aircraft carriers: the
monopsony being with only one purchaser (the United States Navy) and the
monopoly being with only one producer (Huntington Ingalls Industries, as their
Newport News Shipbuilding division is the only place with the capacity to
manufacture, overhaul, and decommission them).
This is the same situation in
which the government now finds itself. There is no chance at all of Irving
Shipyards selling large combat vessels to any other customer other then the
Canadian Federal Government. The Federal Government in turn has committed
itself to buying only from Irving Shipyards
In a Pareto efficient economic
allocation, no one can be made better off without making at least one
individual worse off. It is commonly
accepted that outcomes that are not Pareto efficient are to be avoided, and
therefore Pareto efficiency is an important criterion for evaluating economic
systems and public policies.
The problem of two sided
bargaining is a problem of understanding how two agents should cooperate when
non-cooperation leads to Pareto inefficient results.
In other words, the
government can not use its position to squeeze Irving Shipyards for lower
prices without harming the Shipyard. In turn Irving is in danger of harming the taxpayers
if it attempts to increase profits. The Government can not look for competition
and there is little incentive for industry to pursue higher profits through
increased efficiencies. This extremely complex situation (only hinted at by the
graph above) is one the Government has created by itself.
