National Portrait Gallery London/Wikimedia Commons
National Portrait Gallery London/Wikimedia Commons
Editor's note: This is an excerpt of Planet Money's newsletter. You can sign up here.
Last month, the Supreme Court opened the door for Apple to lose a lot of money. It decided in Apple vs Pepper — the rare court case that sounds like a deathmatch between fruits and vegetables — that Apple could be held liable for how it runs its App Store. Apple typically takes a 30% cut from every app and service sold there, and Robert Pepper, the lead plaintiff for a class action, claims the company's anti-competitive practices are hurting consumers like him.
In handing down this decision, Justice Brett Kavanaugh broke with his conservative colleagues and joined the liberals. Delivering the majority opinion for the court, Kavanaugh wrote that Apple can be sued by its customers "on a monopoly theory." That's pretty standard: when a company, facing little competition, uses its market position to raise the prices of its products, it can be in violation of laws aimed at promoting competition and the well-being of consumers.
But Kavanaugh went further. He said Apple could also be sued by app developers, most of whom are forced to fork over a big percentage of their potential revenue, "on a monopsony theory." Over the last couple years, this obscure economic term — monopsony — has popped up in courtrooms, newspapers, magazines, academic journals, and the halls of government.
If the idea of monopoly were Beyoncé, then monopsony would be Solange. They're close sisters, yet their styles are pretty different. And while only one of them has been famous for a long time, the other one seems to be getting a lot of attention more recently.
What does this term actually mean? And where does it come from? The story is actually pretty fascinating.
The Story Behind A New Word
In the early 1930s, an ambitious British scholar named Joan Robinson set about writing her first book. She had a lot riding on it. Schooled in economics at Cambridge during deeply sexist times, she had taken a backseat to her husband's career ambitions after they graduated. He got on the official track to becoming an economist at the university while she, dreaming of becoming a full-fledged economist herself, had to find another route. This book was her chance to make her mark.
Released in 1933, Robinson's book, The Economics of Imperfect Competition, took aim at the notion that markets were perfectly competitive. Competition, economists believe, ensures prosperity. It's what makes goods and services affordable. It's what drives innovation and economic growth. And by giving us options to quit crummy jobs and get new ones at competing firms, it's supposed to provide a crucial channel for getting a raise. The question Robinson sought to answer was: what happens when markets aren't really competitive?
One day at their home, she and her husband had over a professor from the Cambridge classics department for tea. Robinson's developing theory — about a certain type of power companies might have if they were the only show in town — needed a name. The term "monopoly," which is derived from Ancient Greek, had long been used to describe the power a company had when it was the single seller of something. She wanted to name its inverse — the power a firm had when it was the single buyer of something. After some back and forth about good-sounding Greek names with this Cambridge classicist, she settled on "monopsony."
Companies don't have to literally be the only buyer in a marketplace to wield "monopsony power." If competition isn't perfect — like when there are only a few companies in a market and they aren't undercutting each other's prices — companies gain some ability to lower the price on the stuff they buy. Sellers don't have a lot of other options.
It's easy to understand monopsony power in action in the labor market. Companies buy labor from workers, and when they have this power, they're able to lower the wages they pay. Workers may have to settle because they don't have alternatives. There's a camp of economists and legal scholars who argue that rising monopsony power of companies is the reason why wage growth has been, at least up until recently, disappointing.
And, as the Supreme Court has just acknowledged, Apple might be profiting from its monopsony power in the app market. In this argument, the company is effectively the sole buyer of Apple-compatible apps and services, which allows them to set their fee as high as they want. It is currently 30 percent. There is no alternative if you're an app developer who wants to sell to iPhone and iPad users.
As for Joan Robinson, her book was a smashing success, and it would help her become a professor at Cambridge. There she became a prolific author and a close confidant to John Maynard Keynes. She is now considered by many to be one of the great economic theorists of the 20th century. Among her most unforgettable legacies: the strange word "monopsony."
Did you enjoy this newsletter? Well, it looks even better in your inbox! You can sign up here.