Duopsony

What Is Duopsony?

A duopsony is an economic condition in which there are only two large buyers for a specific product or service. Combined, these two buyers determine market demand, giving them considerably influential bargaining power**,** assuming that they are outnumbered by firms vying to sell to them. It can be compared with a monopsony, or a market where there exists only one large buyer.

Duopsony is also known as a "buyer's duopoly" and is related to oligopsony, a term describing a market where there are a limited number of buyers. This economic theory can be traced back to the work of French mathematician Augustin Cournot.

Understanding Duopsony

Duopsony status gives a company enough leverage to be picky and drive down prices. When there are more sellers than buyers, the purchaser wields market power. A similar theory applies to an oligopoly — when there are only a small number of sellers or, more similar still, a duopoly — where they are only two large sellers in a market.

A simple example of a duopsony would be a town having only two operating restaurants that are hiring workers. If there are many waiters and chefs in the town, the two restaurants will find themselves in a position of high bargaining power, potentially enabling them to get away with offering lower wages than they would if more firms were competing to hire.

The chefs and waiters have no choice but to accept the low pay unless they choose not to work. This shows that firms that are part of a duopsony have the power not only to lower the cost of supplies but also to lower the price of labor.

Alternatively, a fishing fleet of small boats might only have two wholesale buyers in the small port town from which they sail. Those two buyers would hold a duopsony and be able to exert leverage over the wholesale price of the fishing fleet's catch.

The theory of oligopoly and oligopsony, known as Cournot competition, was developed by French mathematician Augustin Cournot in his 1838 book Researches on the Mathematical Principles of the Theory of Wealth.

Special Considerations

Duopsony bargaining power does not always necessarily lead to lower prices and a competitive advantage for buyers. Like any oligopsony or oligopsony, members of duopsony face a kind of Prisoner's Dilemma, where the buyers can both benefit collectively by colluding to keep prices low, but each individually has an incentive to beat out the other buyer by offering a higher price to sellers.

Depending on which strategy the buyers choose, this can lead to a low market price or a higher market price that more closely approaches a competitive market price.

Real-Life Examples of Duopsony

Before the age of Amazon.com Inc.'s (AMZN) dominance in the retail space, Walmart Inc (WMT) and arguably Costco Wholesale Corp. (COST) held duopsony power over their merchandise suppliers. Any supplier of retail goods needed to distribute through these chains or perish. This gave these two companies strong bargaining positions and the ability to extract concessions from these other companies.

In the stock market, financial engineers recognized this, at least for Walmart. They created an index of companies that were dependent on selling to Walmart, called the Walmart suppliers' index.

Another good example is Apple's iOS and Google's Android. Combined, they command nearly 100% of the mobile operating system market share worldwide. As a result, they hold significant sway over the market for mobile app distribution and the labor force of mobile app developers.

Duopsony and Barriers to Entry

Being unique and in the minority is what companies strive to achieve. Less competition usually yields stronger pricing power and higher profitability. Normally, other firms will try to cash in, eliminating the duopsony, although this is not so easy when the end product or service has high barriers to entry.

Profitability and long-term success hinges on a company holding a sustainable competitive edge. In 1980, Harvard professor Michael Porter built on this theory, introducing a model called “Five Forces” to help managers and investors examine how much power companies wield in their industries.

One of Porter’s forces happens to be the power of customers. Customers have the power to drive prices lower and set the terms of a deal when there are fewer customers and more vendors. In turn, vendors will need to become more competitive in their negotiations and offerings in order to win customer business.

The other forces in Porter's model are the threat of new entrants, existing competition, the threat of substitute products, and the power of suppliers.

Duopoly and Duopsony

There are some rare cases where a company can be both a duopoly and duopsony. When you fly you probably notice that the plane you are on probably is either made by Boeing Co. (BA) or Airbus. They are the main sellers of airplanes to airlines, and, as a result, also happen to be the main buyers of the equipment used to build them.

There are hundreds of aerospace component manufacturers competing to win contracts to help build the latest Boeing and Airbus planes. Boeing and Airbus often hold the cards in negotiations, particularly among those firms that supply commoditized products or components that airplanes can do without.