3.4.6: Monopsony

Question 1

What are the characteristics of monopsony?

Answer 1

• A single buyer dominates the market
• The buyer has controlling advantage that drives consumption price levels down
• Monopsonies can arise due to geographical constraints, government regulation, or unique consumer demands
• Monopsonies commonly experience low prices from wholesalers and an advantage in paid wages

Question 2

A real life example of a firm that have monopsony power and why?

Answer 2

• NHS
• The NHS pays less for cancer drugs than a number of other high-income countries

Question 3

Why do firms pay their suppliers the lowest price possible?

Answer 3

• To minimise their costs and make the most of their position as the only buyer.
• This will enable them to maximise their profit

Question 4

What are the benefits to firms?

Answer 4

• The monopsony gains higher profits by being able to buy at lower. 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.

Question 5

What are the benefits to consumers of a monopsonist firm?

Answer 5

• Consumers 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 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 inelastic, there will be little fall in supply.

Question 6

What are the disadvantages to consumers of a monopsonist firm?

Answer 6

• They may act as a counter-weight to monopolists.
• There may be a fall in quality as prices are driven down.

Question 7

What are the advantages to employees of a monopsonist firm?

Answer 7

• 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.

Question 8

What the disadvantages of suppliers of a monopsonist firm?

Answer 8

• Suppliers will lose out as they will receive lower prices; less will be supplied leading to some firms leaving the market.