3.4.6 Monopsony Flashcards
Monopsony
Where there is only one buyer in the market, and other than this it has the
same basic characteristics as monopoly.
- They can prevent new firms entering the
market and aim to profit maximise.
Characteristics of monopsonies
They will pay their suppliers the lowest price possible to minimise their costs and
make the most of their position as the only buyer. This will enable them to maximise
their profit. The value of the goods they buy will depend on how much money they can make with these goods, and this is determined by the demand curve of the
goods they make and sell.
Conditions for monopsonies
In real life, pure monopsonies rarely exist but many firms experience monopsony
power, when they buy a large percentage of the market. One example could be the NHS, who pay less for cancer drugs than a number of other high-income countries. Moreover, food retailers have power when purchasing supplies from farmers; farmers
can either sell them all their goods at a low price or risk not selling them at all.
Costs and benefits of a monopsony to: FIRMS
● The monopsony gains higher profits by being able to buy at lower prices. This increases the funding for research and development and leads to more return for
shareholders.
● They achieve purchasing economies of scale, which will lower costs and increase
profits.
● The NHS is a monopsonist buyer of pharmaceuticals, and this leads to significantly
lower prices. As a result, they can invest more and pay for more treatments.
Costs and benefits of a monopsony to: CONSUMERS
● Customers may gain from lower prices as reduced costs are passed on.
● It could lead to a fall in supply, since the business buys fewer inputs. The extent to
which supply to customers will fall will depend on the price elasticity of supply in the
market of which the monopsonist is a buyer: if it is inelastic, there will be little fall in
supply.
● They may act as a counter-weight to monopolists.
● There may be a fall in quality as prices are driven down.
Costs and benefits of a monopsony to: EMPLOYEES
● The supplier will sell less goods and so employ less people, whilst the monopsonist
may employ fewer, more or the same amount of people since they have less inputs
to use for production but their costs are also lower.
● Monopsonists may pay higher wages as they are making higher profits.
Costs and benefits of monopsonies to: SUPPLIERS
● Suppliers will lose out as they will receive lower prices ; less will be supplied leading
to some firms leaving the market.
