3.4.6 Monopsony

Question 1

What is a monopsony?

Answer 1

A monopsony has buying or bargaining power in their market.This buying power means that a monopsony can exploit their bargaining power with a supplier to negotiate lower prices. The reduced cost of purchasing inputs increases their profit margins

Question 2

What are examples of monopsony power in a market?

Answer 2

• Electricity generators negotiate lower prices for coal contracts
• Food retailers have power when sourcing/purchasing supplies direct from farmers, milk producers, wine growers and other suppliers
• The UK National Health Service is another example of a dominant buyer of prescription drugs from the pharmaceutical companies.

Question 3

Give chains of reasoning explaining monopsony power and the effect on consumer welfare.

Answer 3

Question 4

What are the benefits of a monopsony to a firm?

Answer 4

1. Monopsony power allows bigger firms to achieve purchasing economies of scale leading to lower long run
   average costs
2. Lower purchase costs bring about higher profits and increased returns for shareholders
3. The extra profit might be used to fund capital investment or research and development

Question 5

What are the benefits of a monopsony to a consumer?

Answer 5

1. Consumers gain from lower prices e.g. supermarkets negotiate better prices from manufacturers that are then
   passed on to consumers
2. Improved value for money – for example the NHS can use its bargaining power to cut the prices of drugs
   used in treatments. Cost savings allow for more treatments within the NHS budget

Question 6

What are the drawbacks from monopsony power?

Answer 6

1. Businesses may use their buying power to squeeze lower prices out of suppliers. This reduces the profits of
   firms in the supply chain and causes lower incomes
2. A recent example has been the battle of milk farmers to get a higher price from supermarkets that covers the
   average cost of their milk (i.e. avoid subnormal profits, threat of closure)
3. Consumers might be faced with less choice or higher prices in long run if some suppliers leave the market