Large manufacturing firms that buy many different parts or components (e.g., auto manufacturers) can choose which parts to buy from other firms and which parts to make in their own factories. These manufacturers may be able to use monopsony power to reduce the price paid to outside suppliers for parts that are:

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If the parts are only used in their cars, then there is only one buyer (the manufacturer) and a few sellers. This gives the manufacturer monopsony power, which allows them to negotiate lower prices with the suppliers. In contrast, if the parts are standard components for many manufacturers and there are many buyers and sellers, then the market is likely to be more competitive, and the manufacturers may not be able to exercise as much monopsony power to reduce prices. If the parts are bought and sold in perfectly competitive markets, then there is no monopsony power and the manufacturers must pay the market price for the parts.

Large Manufacturing Firms That Buy Many Different Parts or Components