9.5 - Monopsony Product Market Flashcards
What is a monopsony market?
A monopsony market is where one dominant buyer exists with price making power and thus the ability to use this buying power to drive down prices of its suppliers and increase its profits. Sellers in the market to the monopsonist are small, operating in a competitive market with no ability to set prices; they are price takers. There are high barriers to entry in a monopsony market preventing the entry of new buyers.
What is one benefit that consumers can experience as a result of monopsony power?
Consumers can benefit from lower prices. Monopsonists use their buying power to drive down the price of inputs from suppliers, reducing their costs of production, which can then be passed onto consumers via lower prices. This leads to an increase in consumer surplus and improved affordability of potentially essential goods, which ultimately improves equity.
What is a potential negative impact of monopsony power on consumers?
Consumers can suffer from lower quantity in the market. As monopsonists drive down prices of suppliers heavily, suppliers are less willing and able to supply the good at that price, reducing the overall quantity available in the market. This can result in shortages, leaving consumers unable to purchase exactly what they demand at that price in stores.
Evaluation: Is there a guarantee that lower costs for monopsonists will lead to lower prices for consumers?
No, there is no guarantee that lower costs for monopsonists will lead to lower prices for consumers. While monopsonists may use their buying power to drive down supplier prices and benefit from lower costs, they may choose to use excess funds to reward shareholders with higher dividends, pay workers higher wages, reinvest back into the company, pay off debts, or even increase savings. In this case, the advantage of monopsony power stays within the firm rather than providing direct wider benefit to consumers.
What is one advantage that a firm can experience as a result of monopsony power?
A monopsonist is able to make higher profits. By using their buying power to drive down the price of inputs from suppliers, monopsonists can reduce their costs of production and increase their profit margins. This allows firms to either lower prices for consumers, which can be useful for gaining market share in a competitive market, or use the extra profits for reinvestment to promote dynamic efficiency.
Evaluation: What is a potential threat to a monopsonist’s profitability as a result of excessive abuse of monopsony power?
The potential threat to a monopsonist’s profitability is the intervention from competition authorities. Excessive abuse of monopsony can have detrimental impacts on suppliers and can attract regulation, which can harm the profitability and market dominance of a monopsonist. For this reason, monopsonists may not use their buying power to drastically reduce prices of their suppliers, reducing the net benefit to consumers and profit margins.
How does monopsony power affect suppliers?
Monopsony buying power will drive down prices, revenues, and profits for suppliers, promoting inequity and negatively impacting the living standards of producers. If prices are driven down so low that losses are made by suppliers, it could force them to move into other business activities, potentially causing the industry to collapse.
Evaluation: What is the potential impact on suppliers if a firm has some competition despite having monopsony power?
The negative impact on suppliers depends heavily on the extent of monopsony power. In reality, pure monopsony is rarely seen, and firms with monopsony power may still face some competition. As long as this is the case, there is potential for suppliers to renegotiate contracts in their favour with a monopsonist or to seek other buyers in the market.
What is one benefit that suppliers can still experience despite the cost of monopsony power abuse?
Despite the cost to suppliers of monopsony power abuse, it cannot be ignored that suppliers can still benefit from having contracts with large firms. Even if prices are forced down lower than suppliers would like, given contracts and very large orders that monopsonists can make, suppliers can remain profitable, and living standards and the industry can be protected because of this demand.
What is the government’s concern when a monopsonist abuses their buying power to reduce prices of suppliers?
The government will be concerned with the inequity, lower living standards for suppliers, and potential industry decline that can result from monopsonists abusing their buying power to reduce prices of suppliers. This also causes allocative inefficiency in the market, with lower than socially optimal quantities resulting, which calls for intervention by competition authorities. This could take the form of fining the monopsonist’s revenue/profit, price regulation (minimum pricing), deregulation to promote greater competition, and/or blocking mergers that could result in monopsony power.
Evaluation: What is an important factor to consider when determining whether actual abuse of monopsony power exists or whether demands for lower prices are due to supplier inefficiencies?
As well as the problems with intervention by competition authorities discussed on pages 105-106, it is important to determine whether actual abuse of monopsony power exists or whether demands for lower prices are due to supplier inefficiencies. If the latter is true, the call for lower prices will force suppliers to make efficiency savings, improving resource allocation and therefore is not a concern.
