Learn to Love Monopsony Power

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Monopsony is a word that political observers need to learn, and that left-leaning activists need to learn to love.

Monopsony is the opposite of monopoly. Monopoly means a single seller, and monopsony means a single buyer. Buying stuff from a monopoly provider usually sucks, but being part of a monopsony is totally awesome.

Here are three monopsony buyers: CostCo, Amazon, Medicare.

Buying products and services through these organizations is cheaper than buying products on your own.

If I want to buy some Beats By Dre headphones, it’s cheaper for me to buy them from Amazon ($179.00) than to buy them directly from Dr. Dre ($199.00).

Why is this? Because Amazon represents a massive number of customers, they buy a crap ton of Beats By Dre headphones, and so they have more market power. Representing a huge pool of customers allows Amazon to drive a very hard bargain with Dr. Dre, and push down the cost of Beats By Dre headphones for Amazon’s customers.

This is also why Medicare does a better job of controlling costs than private insurance.

Like Amazon, Medicare’s large customer base gives it more market power to drive a hard bargain with health care providers, push down the cost of health care products and services for Medicare’s customers.

This is why Pat Toomey’s comments on Medicare, and the Republican agenda for Medicare, make no economic sense.

It’s not Medicare that’s unsustainable – it’s the price inflation of the stuff Medicare pays for.

The solution, then, is not to have fewer people enrolled in Medicare, but more. Fewer people shopping through Amazon would not make Beats By Dre headphones cheaper, and fewer people in the Medicare risk pool will not make health care prices lower.

The key difference between the parties on health care costs is that Democrats want Medicare to have more monopsony power to push down provider prices, and Republicans want it to have less.

This entry was posted in Budget, Economy, Health.

6 Responses to Learn to Love Monopsony Power

  1. phillydem says:

    I think more accurately businesses like Amazon, CostCo, WalMart, etc benefit from large economies of scale due to their volume of orders and also limited/preferred suppliers. They have market power. CostCo and other big box stores generally use that to offer the lowest prices they can to consumers. Amazon, otoh, uses its market power to sell at below cost in order to drive other competitors out of the market where it can eventually raise prices and have monopoly control.

    The Federal government, Medicare in this case, benefits from the large same economies of scale. Should the US have, at some point, a single payer system like Medicare-for-all, then you’d correct in calling Medicare a monopsony.

    • Jon says:

      Indeed, was just trying to illustrate the general point about group buying power, and help popularize the monopsony concept on the left.

      • phillydem says:

        I know, but it’s the Economy of Scale, created by purchasing for a large group or large market, that brings costs down, not having only one buyer (monopsony).

        • Jon says:

          I wanted to draw a distinction between economy of scale, where adding a marginal unit costs less than adding the first, and monopsony, which is more about power dynamics. Health care providers are going to charge as much as they can make the buyers pay, unless we pool the risk and make them charge less than they want to.

        • Jon says:

          Consolidating municipal governments would be a good example of economy of scale. Costs residents less per capita to have a few big school districts than lots of small districts.

  2. tgbthyujiu says:

    Why is this? Because Amazon represents a massive number of customers, they buy a crap ton of Beats By Dr Dre Kobe Bryant, and so they have more market power. Representing a huge pool of customers allows Amazon to drive a very hard bargain with Cheap Beats Dr Dre, and push down the cost of Beats By Dr Dre Sale headphones for Amazon’s customers.