Creating inefficient use of land, labor and capital, a Comcast Time Warner merged firm would become a monopsony.

Why Mickey Mouse Worries About Monopsonies

Jun 22, 2014 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Entertainment, Financial Markets, Households, Labor, Lifestyle, Media, Regulation • 156 Views    No Comments

No, we don’t mean monopoly. A monopoly is the single seller in a large or small geographic area. Monopsony, by contrast, indicates there is a single buyer.

In a competitive market structure, monopsony means one buyer.

From: SMBC

Where are we going? Whereas a monopoly has the power to charge too high a price, the amount a monopsony pays to its suppliers is too low. As a result, like monopolies, they are inefficient users of land, labor and capital.

Comcast’s pending acquisition of Time Warner Cable is an example of why monopsonies are worrisome. Not yet approved by the Justice Department, a merger of Comcast with 21.6 million subscribers and Time Warner Cable with 11.4 million would create a more concentrated competitive market structure. As the 2 largest cable companies in the US, combined, they would control close to 30% of the market and have the power to offer suppliers of programming like Walt Disney an excessively low price. From the supply side, Disney then has the incentive to provide less programming. And even if Disney said okay, the monopsony would probably not pass along its savings to us.

Until the beginning of 1976, when baseball players were no longer prohibited from negotiating elsewhere because of the reserve clause, team owners ran monopsonies. Some say public school teachers work for a monopsony because there is only one local school district. Others see company towns where there is one employer as a monopsony.

You can see below the markets in which monopsony creates a gap–called the “rate of exploitation”– between the wage that is paid and the market wage.

As a competitive market structure, monopsony creates inefficiencies

From: “Monopsony in American Labor Markets”

Our bottom line? A firm’s competitive market structure shapes its behavior. For monopsony, that means excessive control of suppliers–who could be other producers or labor–and inefficiency.

Do you think the Comcast/Time Warner Cable Deal should proceed? Please let us know in a comment.

Sources and more... To better grasp why the Comcast-Time Warner Cable merger has been contested, you might find that this Reuters article, this from Business Insider, a great chart on consolidation from WSJ and the discussion of the history of monopsony all provide insight. But for some fun, do look at other SMBC cartoons. Finally, I should add that it is somewhat unsettling to see all of the firms that Comcast controls.  

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