3.4.6 Monopsony

Question 1

What is a monopsopy?

Answer 1

Occurs when there is a single buyer in the market.

Question 2

Pure monopsopy?

Answer 2

Very rare - usually just a very dominant buyer like the ministry of defence buying most of the war materials.

Question 3

Three characteristics of a monopsony?

Answer 3

• Wage makers
• Profit maximisers - minimise costs by paying as little as possible.
• Purchase a large portion of the market supply provided by sellers.

Question 4

Benefits of a monopsony

Answer 4

• Reduce costs of production = higher profits
• Higher profits = Higher wages for employees
• Lower AC = lower prices for consumers = more consumer surplus

Question 5

Benefits of supplying to a monopsony?

Answer 5

• Supplying to a large well-known monopoly may enhance the supplier’s reputation and open up new opportunities
• Supplying to a large, well-known monopoly may provide an opportunity to increase sales volume

Question 6

Costs of being a monopsony?

Answer 6

• May experience some reputational damage for the way they treat their suppliers
• The continual price pressure on suppliers often results in conflict, which can be difficult to manage
• In the long-run, they may drive their suppliers out of business, causing supply chain issues
• Employees may find it difficult to reconcile their ethics/values with the way suppliers are treated
• The quality of the product may decrease as suppliers attempt to cut their own costs in response to the price pressure from the monopsonist

Question 7

Costs of supplying to a monopsony?

Answer 7

• Price suppression - In a monopsony, the single buyer has the power to push prices down, often below the competitive market level.
• Little negotiating power.
• Forced to cut costs to keep up with lower prices = less investment / innovation = worse product quality.
• Dependency and vulnerability