3.4.6 Monopsony

Question 1

What is a monopsony?

Answer 1

Where a single buyer dominates a market.

Question 2

Are monopsonists price makers?

Answer 2

Yes - they can drive down prices.

Question 3

Examples of a monopsony

Answer 3

• Supermarkets (when buying from their suppliers).
• The Ministry of Defence is a dominent purchaser of war materials supplied by UK companies.
• The NHS is the dominant purchaser of medical equipment and labour.

Question 4

Characteristics of a monopsonist

Answer 4

• They are wage makers (firms set wages in the market).
• They are profit maximisers - often done by minimising their costs by paying their suppliers as little as possible.
• They purchase a large portion of the market supply provided by sellers.

Question 5

Benefits of a monspony for firms

Answer 5

• Reduced costs of production lead to higher profits.
• Can produce at allocative efficiency.

Question 6

Disadvantages of a monspony for firms

Answer 6

• May experience some reputational damage for the way they treat their suppliers.
• The continual price pressure on suppliers often results in conflict with them which can be difficult to manage.
• In the long-run, they may drive their suppliers out of business – causing supply chain issues.

Question 7

Benefits of a monspony for suppliers

Answer 7

• Supplying to a large well-known monopoly may enhance the supplier’s reputation and open up new opportunities.
• Suppling to a large well-known monopoly may provide an opportunity to increase sales volume.
• Suppliers have a constant income stream.

Question 8

Disadvantages of a monspony for suppliers

Answer 8

• Suppliers may seek to reallocate their resources to more profitable industries leading to less supply in the market.
• Suppliers may be driven out of business.
• Strict regulations or cosmetic standards from the monopsonist can lead to waste.

Question 9

Benefits of a monspony for employees

Answer 9

• The higher profits often result in higher wages for the monopsonist employee.
• Investment in training.
• Job security.

Question 10

Disadvantages of a monspony for employees

Answer 10

• Employees may find it difficult to reconcile their ethics/values with the way suppliers are treated.

Question 11

Benefits of a monspony for consumers

Answer 11

• Lower AC for the firm may result in lower prices for consumers.
• Monopsonists can set strict regulations on products, ensuring quality.

Question 12

Disadvantages of a monspony for consumers

Answer 12

• The quality of the product may decrease as suppliers attempt to cut costs.
• Possible reductions in supply.

Question 13

Positives of monopsonist power

Answer 13

• Improved value for money - e.g. the NHS could use its bargaining power to drive down the prices of routine drugs.
• Producer surplus
• A monopsony can act as a counter-weight to the selling power of a monopsonist.
• The growth of fair trade.
• Working for a monopsonist is associated with job security. e.g. Civil Service.