3.4.6-7 Monopsony + Contestability

Question 1

what is meant by monopsony

Answer 1

only one buyer in the market; firms can set market price -> can exploit bargaining power -> reduced purchasing costs -> increase profit margins

Question 2

what are benefits to consumers of monopsony power?

Answer 2

• lower prices -> firms have bargaining power -> lower prices are passed down to consumers -> increases real incomes and consumer surplus
• improved value for money
  EVAL:
• consumers may have less choice -> less competition = firms may increase prices in the LR
• lower prices may lead to reduced quality as firms try to maximise profits
• monopsony power can drive smaller suppliers out of the market -> reduced choice

Question 3

pros and cons of monopsony power on firms

Answer 3

PROS:
- benefit from purchasing EoS -> lower LRAC -> higher SNP -> higher returns for shareholders
- cost advantage over competitors -> market dominance

CONS:
- regulation
- too much pressure on suppliers -> business closure or low-quality inputs

Question 4

pros and cons of monopsony power on suppliers

Answer 4

PROS:
- guaranteed demand for suppliers -> consistent flow of income -> revenue stability

CONS:
- monopsonist has bargaining power -> squeeze low price from suppliers -> lower revenue generated -> less profit -> may engage in cost-cutting measures -> harms product quality/innovation -> job insecurity

Question 5

how can monopsony power be controlled?

Answer 5

• promoting market contestability
• gov. regulation and legislation

Question 6

what is meant by contestability

Answer 6

how easy it is for new firms to enter and exit a market

Question 7

characteristics of a contestable market

Answer 7

• no sunk costs
• equal access to technology
• weak brand loyalty
• no collusion
• perfect information

Question 8

to what extent will a highly contestable market lead to economic efficiency

Answer 8

ALLOCATIVE:
- more competition -> downward pressure on prices -> price=MC -> firms make better deals to consumers
- if prices up -> challenger firms enter + undercut them using hit and run entry

PRODUCTIVE:
- more incentive to keep costs low -> avoiding managerial slack
- EoS -> firms have competitive advantage

DYNAMIC:
- more incentivised to innovate -> product development -> gain competitive advantage

Question 9

types of barriers to entry and exit

Answer 9

• EoS -> new entrants may struggle to compete with incumbent firms’ cost advantages
• capital requirements: high startup/investment costs -> deters newcomers
• gov. regulation e.g. licensing
• brand loyalty
• patents/intellectual property

EXIT COSTS:
- redundancy costs
- paying off leases

Question 10

what is meant by sunk costs

Answer 10

costs that have already been incurred and cannot be recovered