Monday, May 15, 2006

Oligopsony

Tyler Cowen links to a story about "team buying" in China. According to this article, the newest trend in China is for groups of consumers to meet online and agree to a place and time to go shopping for a common good they all want to buy. Upon arriving at the store in a group, they bargain jointly for a reduction in price.

It's an interesting idea... I believe that when firms do this, we call it... oh, what's the word... ah, that's it!

Seriously, though, I imagine that the increase in market power with isolated groups of individual consumers banding together to get price discounts is negligable, and unlikely to cause any problems. If it were to catch on, though, in large numbers, we'd have to start thinking about social surplus issues a little bit. No one like a monopoly (except the monopolist), but I wonder what popular sentiment would be if supplies dried up and surplus disappeared because of the low prices demanded by monopsonist/oligopsonist consumer groups?

Furthermore, while oligopoly and monopoly may cause static (short-run) losses to society, at least they preserve the incentive for innovation (this is why we allow patents). Market imperfections like this would, if they existed on a large scale, dry up firms' R&D incentives, causing not only static losses, but also persistent ones.
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