LS15 - Monopsony, Natural Monopoly

Question 1

Monopsony

Answer 1

One buyer, many sellers
Monopsony power - if a producer only has one/few buyers, these buyers have larger bargaining power (over price+other factors), as the producers have limited choice
Buyers are more likely to get price reductions
Price and output lower than competitive conditions
Example - supermarkets like Tesco and Sainsburys (large market shares) have large monopsony power over suppliers - easier to negotiate discounts and other perks; Tesco controversy - used monopsony power to delay payments to suppliers
Consumers can benefit from monopsony power - firms could pass on lower costs to consumer
Sellers make less revenue/profit and struggle to stay in business - reduce quality to reduce costs

Question 2

Natural monopoly

Answer 2

Only ONE firm in the market
Efficient for only one firm to operate - would be inefficient, duplication of resources and very expensive for other firms to enter
Incumbent firm would always have lower AC than new entrant - AC and MC continue to drop as output rises
Extremely high fixed costs and start up costs
Example - Network Rail - only one firm operates all of the tracks - would be waste of resources to build another set of tracks

Question 3

Barriers to entry and exit

Answer 3

Any obstructions that prevent or hinder a firm fron entering or exiting a market
* Structural - natural barriers such as existence of a natural monopoly; very high fixed/capital costs that hinder a firm from entering; sunk costs arising from capital or advertising
* Strategic - branding and advertising by incumbents can build brand loyalty and make it tougher for new entrants to grow; vertical integration can be used to control supply chains; patents to prevent other firms from using certain production techniques
* Statutory - legal requirements that a new firm has to meet - ex: liquor license

Question 4

Costs and benefits of monopsonies to firms, consumers, employees, suppliers

Answer 4

+ lower prices for consumers (reduced costs passed on),
+ employees of monopolist may receive higher wages (higher profits) but less employees of supplier
+ purchasing economies of scale (lower costs, higher profits)
+ higher profits so increased R&D funding, higher dividends to shareholders

• suppliers driven out of business (low prices, low supply, low profit)
• supplier may provide lower quality to remain profitable
• could lead to fall in supply as Q lower (EVAL depends on PES, inelastic = small fall)
• exploitation of power by monopsonist