3.4.6 monopsony

Question 1

What is a monopsony?

Answer 1

A monopsony occurs when there is only one buyer in a market.

Question 2

What are the characteristics of a monopsony?

Answer 2

• has buying/bargaining power within the market
• able to negotiate lower prices, however suppliers also supply less to the market
• profit maximisers = reduced cost of purchasing FOPs increase profit margins
• exists within product and labour markets

Question 3

What are some examples of a monopsony?

Answer 3

• the government dominates the market for hiring teachers = monopsony
• electricity generators negotiate lower prices for coal and gas supplies
• NHS is a major buyer of prescription drugs from pharmaceutical companies
• food retailers have power when purchasing supplies from farmers, milk producers and wine growers

Question 4

What are the benefits of monopsony power for firms?

Answer 4

• allows larger firms to achieve purchasing economies of scale, lowering LRAC
• lower purchasing costs brings about higher profits and increased returns for shareholders
• extra profit may fund capital investment or R + D

Question 5

What are the costs of monopsony power for firms?

Answer 5

• relationship with suppliers may worsen, the monopsonist may drive the supplier out of business
• businesses exploit bargaining power to get lower prices from suppliers, reducing profits of firms in the supply chain

Question 6

What are the benefits of monopsony power for consumers?

Answer 6

• consumer surplus may be increased due to lower prices
• improved value for money
• counters the market power of monopolists, the interests of consumers are protected

Question 7

What are the costs of monopsony power for consumers?

Answer 7

• supplier may cut corners/lower quality to lower costs and remain profitable
• ## could lead to a fall in supply, as the business buys fewer inputs - dependent on PES

Question 8

What are the benefits of monopsony power for employees?

Answer 8

• minimised raw material costs could mean increased wages for staff working for monopsonists

Question 9

What are the costs of monopsony power for employees?

Answer 9

• they may question the ethics of the firm they work for
• the supplier sells less goods, so they employ less people

Question 10

What are the benefits of monopsony power for suppliers?

Answer 10

• if the supplier is a monopolist, their market power can counteract the monosponist’s power

Question 11

What are the costs of monopsony power for suppliers?

Answer 11

• buyer minimises costs so the supplier receives a lower price
• monopsonist may exploit market power by paying less
• suppliers may be driven out of the market due to lower profits