In economics, a monopsony is a market form in which only one buyer faces many sellers. It is an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers. As the only purchaser of a good or service, the monopsonist may dictate terms to its suppliers in the same manner that a monopolist controls the market for its buyers
It has been argued that Wal-Mart, in the United States, functions as a monopsony in certain market segments, as its buying power for a given item may dwarf the remaining market. This allows it to pressure suppliers into selling products at preferred rates.
This is probably the strategy the government was hoping to follow with its National Shipbuilding Procurement Strategy (NSPS). For large ship construction, Canada has establish a strategic relationship with two Canadian shipyards, selected through an open and fair national competition, and designated them as sources of supply, one for combat vessels and the other for non-combat vessels. It is likely that the government hoped that functioning as a monopsony would leave them in a position which would allow them to keep costs down.
It should be noted that another example of a monopsony is a single-payer universal health care system, in which the government is the only "buyer" of health care services. The inability of governments to find cost savings in the health care system is well documented and this alone should have given the government pause.
On October 19, 2011, the NSPS Secretariat announced the two Canadian shipyards that were selected to rebuild the Canadian fleets. Irving Shipbuilding Inc. was selected to build the combat vessels while Vancouver Shipyards Co. Ltd. will build the non-combat vessels. The total value of both projects is $33 billion; the projects will span 20 to 30 years. This represents the largest procurement sourcing arrangement in Canadian history.
It also created a bilateral monopoly. In a bilateral monopoly there is both a monopoly (a single seller) and monopsony (a single buyer) in the same market. In such, market price and output will be determined by forces like bargaining power of both buyer and seller.
In one example a bilateral monopoly exists in the market for nuclear-powered aircraft carriers: the monopsony being with only one purchaser (the United States Navy) and the monopoly being with only one producer (Huntington Ingalls Industries, as their Newport News Shipbuilding division is the only place with the capacity to manufacture, overhaul, and decommission them).
This is the same situation in which the government now finds itself. There is no chance at all of Irving Shipyards selling large combat vessels to any other customer other then the Canadian Federal Government. The Federal Government in turn has committed itself to buying only from Irving Shipyards
In a Pareto efficient economic allocation, no one can be made better off without making at least one individual worse off. It is commonly accepted that outcomes that are not Pareto efficient are to be avoided, and therefore Pareto efficiency is an important criterion for evaluating economic systems and public policies.
The problem of two sided bargaining is a problem of understanding how two agents should cooperate when non-cooperation leads to Pareto inefficient results.
In other words, the government can not use its position to squeeze Irving Shipyards for lower prices without harming the Shipyard. In turn Irving is in danger of harming the taxpayers if it attempts to increase profits. The Government can not look for competition and there is little incentive for industry to pursue higher profits through increased efficiencies. This extremely complex situation (only hinted at by the graph above) is one the Government has created by itself.