3.4.6 - Monopsony

Question 1

Define monopsony

Answer 1

a single buyer of a good or service; they contol the market for a particular good or service , setting price and quality levels bc without that buyer there is insufficient demad for a product to survive

Question 2

Examples of monospony

Answer 2

• gov is monopsony employers of soldiers in the army and medical professionals in the NHS
• gov is a monopsony buyer of military equipment for army and medical equipment for NHS

Question 3

What is a characteristic of a monopsonist

Answer 3

they have a large amount of bargaining power so they argue for a lower price and output comapred to a competitive market condition

Question 4

What is the benefit of a monopsonist

Answer 4

• lower prices
  -deferred payments like tesco in 2016 with small suppliers to make their finances seem beter thna theya ctually are
• receive payments for simpley agreeing to contracts

Question 5

When does a monopsonist benefit consumers

Answer 5

• in a situation where there is high degree of market concentration
• bc monoposonist bargains a lower price from suppliers and pass on the savings to consumers

Question 6

Define monopsony power

Answer 6

whne a buyer has a significant amount of power over suppliers to a small number of sellers in the market

Question 7

example of natural monopoly

Answer 7

• water distribution, gas electricity distribution, rail track providers

Question 8

characterisitics of natural monopoly

Answer 8

• huge fixed costs
• enormous potential for EOS; AC is downward sloping and to reduce ac levels, need to produce lots so the massive fixed costs are spread over lots of output
• rational for 1 firm to supply the entire market; competition is undesirable bc
• competition creates a wasteful duplication of resources and non exploitation of full EOS -allocative and productive inefficiency

Question 9

Why does competition create a wasteful duplication of resources

Answer 9

• first firm into market has EOS advanatge so later entrantd have less EOS adavanteg so they are eventually priced out and leave market, meaning theire resources and infrastrtucre are wasted
  -not full exploitation of EOS, productive inefficiency bc if comp, firms cannot grow as big, less output so EOS cannot be fully exploited

Question 10

What is the diagram like

Answer 10

econ plus dal diagram check it out

Question 11

List 5 examples of natural monopolies

Answer 11

• gas and electricity distribution (national grid)
• internet distribution (BT openreach and virgin)
• rail track and infrastructure (network rail)
• water companies - high fixed costs of buuilding and maintaining pipe infrastructure

Question 12

outline water companies and natural monopolies

Answer 12

• high fixed costs of buuilding and maintaining pipe infrastructure as well as water treatment infrastructure allowing them to benefit from large EOS
• essential nature of clean water means they are regulated by ofwat who us RPI-K prcie regulation to ensure prices are affrodable for consumers but also ensuring enough profit are made by companies to reinvest to maiantain infrastrtcure

Question 13

effects of a monoposony on suppliers

Answer 13

• Lower prices compared to competitive conditions > lower revenues and profit - more likely to make losses -> more likely to leave the market.
• Greater pressure to reduce costs (this can be seen as a positive for the economy as a whole).
• Suppliers more likely to reduce quality to lower costs.
• Tougher non-price conditions often imposed e.g. extra payments or delayed payments.
• The opportunity for long term contracts with major buyers can be lucrative.
• Developing a solid relationship with major buyer can remove a large amount of uncertainty.
• The buyer/seller relationship may be harmonious and not exploitative.

Question 14

effect of a monopsony on tesco for example

Answer 14

• Lower prices compared to competitive conditions -> higher revenue and profit
  (increased producers surplus)
• More likely to receive perks from suppliers such as payments to ensure suppliers products appear in all stores/locations.
• Product quality may fall if suppliers reduce quality in response to cost pressures placed on them by monopsonists (EV; but firms may eventually switch suppliers if this is the case

Question 15

effect of a monopsony on consumer

Answer 15

• If the monopsonist passes on some of the costs savings, lower prices and higher consumer surplus.
• Monopsonists can counter firms with monopoly power.
• Supply may be constrained due to the lower prices received by suppliers.
• Choice may also be constrained if suppliers are forced out of the market.

Question 16

effect of a monopsony on worker

Answer 16

• Lower prices > suppliers reduce output -> less workers needed.
• Suppliers may worsen working conditions to reduce production costs e.g. not meet minimum wage, not follow health and safety standards.

Question 17

examples of monoposony

Answer 17

• supermarkets; tesco demands supplier price cuts in discount battle in 2020 bbc headline
  -In September 2014 a £250m black hole was found in the company’s accounts - a sum later revised up to £326m - because of the way Tesco booked income from its suppliers.

Ms Tacon said: “I received internal Tesco emails which encouraged Tesco staff to seek agreement from suppliers to the deferral of payments due to them in order to temporarily help Tesco margins.

• NHS; The NHS is a monopsonist buyer of pharmaceuticals (pay less for cancer drugs than other high- income countries) , and this leads to significantly lower prices. As a result, they can invest more and pay for more treatments.
• british sugar
• amazon
• food manufacturers; farmers
  can either sell them all their goods at a low price or risk not selling them at all.
• energy generators

Question 18

Effect of monopoly on firms

Answer 18

● Monopolists have the potential to make huge profits for their shareholders through
profit maximisation.
● The existence of supernormal profits means firms will have finance for investments and will be able to build up reserves to overcome short term difficulties.
● Firms with monopoly power will be able to compete against large overseas
organisations.
● Large firms will be able to maximise economies of scale, reducing costs and
increasing profit further.
● However, firms may not always choose to profit maximise because of
X-inefficiencies, sales or revenue maximising, profit satisficing or contestabilitu leading to limit pricing. In the long run, the lack of competition may mean that firms become complacent and so they may not make maximum profits.

Question 19

Effect of monopolies on workers

Answer 19

● Monopolists produce at lower outputs, so will employ fewer workers.
● However, the inefficiency of the monopoly may mean employees receive higher wages, particularly directors and senior managers. Profit satisficing or sales/revenue maximising may mean output is higher and so more employees are employed

Question 20

effect of monopolist on suppliers

Answer 20

• For suppliers, the impact of a monopolist will depend on the extent to which the
  monopolist is also a monopsonist . If the monopolist buys all or most of the
  suppliers’ goods (so is a monopsonist), it will reduce the suppliers’ profits as the
  monopolist will decrease prices.

Question 21

effect of monopoly on consumers

Answer 21

● With a natural monopoly, consumers tend to be better off than if there was
competition.
● When firms enjoy economies of scale , they will be more efficient and customers will enjoy a higher consumer surplus.
● Monopolists may produce an increased range of goods or services due to cross
subsidisation.
● The use of price discrimination will allow for survival of a product or service , and
benefits some customers (those in the cheap market) whilst is negative for others.
For example, it is said that economy class flights are funded by business class flights
● Consumers may pay higher prices and see a poorer quality service , due to a lack
of competition.
● There is less choice for consumers, since there is only one firm producing the good.

Question 22

refer to save my exams costs and advantages of a monopoly!!!!!!!

Answer 22

DO IT