LS15 - Monopsony & Natural Monopoly Flashcards
Describe what a monopsony is, also describe monopsony power and the distinction between the two.
Monopsony: there is a single buyer of a good or service (large power over quality and price suppliers decide on as without them there would be no demand for the good or service). There are few markets with pure monopsonies, an example would be the NHS in the labour market for doctors.
Monopsony power: when a buyer has a significant amount of power over suppliers to a small number of sellers in the market. This is more common. However, both are more likely to be successful when seeking price reductions.
Describe (using the real life example of supermarkets) how this may impact suppliers and consumers.
Major supermarkets like Tesco and Sainsbury’s wield significant monopsony power due to their large market shares, enabling them to negotiate favorable terms from suppliers. For instance, with around 300 mushroom suppliers in the UK, Tesco can leverage its buying power, knowing suppliers are eager for a lucrative contract, while Tesco can easily move to another supplier if terms aren’t met. This power dynamic allows supermarkets to secure discounts, extended payment terms, and even additional payments from suppliers just for securing a contract. In concentrated markets like shampoo and beverages, monopsony power can counterbalance producers’ monopoly power, potentially leading to lower consumer prices if the savings are passed on. Therefore, while tough on suppliers, monopsony power in supermarkets may benefit consumers in certain high-market-concentration sectors.
Describe what suppliers experience in a monopsony situation
Lower prices compared to competitive conditions → lower revenues and profit → more likely to make losses → more likely to leave the market.
Greater pressure to reduce costs (this can be seen as a positive for the economy as a whole). But suppliers more likely to reduce quality to lower costs.
Tougher non-price conditions often imposed e.g. extra payments or delayed payments.
The opportunity for long term contracts with major buyers can be lucrative and can remove a large amount of uncertainty.
The buyer/seller relationship can be harmonious and not exploitative.
Describe what monopsonists experience in a monopsony situation
Lower prices compared to competitive conditions → higher revenue and profit
More likely to receive perks from suppliers such as payments to ensure suppliers products appear in all stores/locations.
Product quality may fall if suppliers reduce quality in response to cost pressures placed on them by monopsonists (EV: but firms may eventually switch suppliers if this is the case).
Describe what consumers experience in a monopsony situation
If the monopsonist passes on some of the costs savings, lower prices and higher consumer surplus.
Monopsonists can counter firms with monopoly power.
Supply may be constrained due to the lower prices received by suppliers.
Choice may also be constrained if suppliers are forced out of the market.
Describe what workers experience in a monopsony situation
Lower prices → suppliers reduce output → less workers needed.
Suppliers may worsen working conditions to reduce production costs e.g. not meet minimum wage, not follow health and safety standards.
Why does a natural monopoly have a different shaped LRAC curve than a standard monopoly?
A natural monopoly has a different shaped LRAC curve due to the presence of significant barriers to entry that prevent new firms from entering the market and competing with the existing firm. This allows the natural monopoly to produce at a larger scale and lower average costs than a standard monopoly.
Where would a profit-maximising monopoly firm set price and quantity?
They would set price and quantity where MR=MC
State and explain an example of a natural monopoly
An underground railway system in London would have high set up costs such as building the rail network and the trains. However, once complete the marginal cost of carrying one extra passenger is relatively low. It doesn’t make sense to have parallel rail systems competing for the same passengers on one route. This is a natural monopoly.
What is a competitive monopoly? Give an example.
This is when firms in a market have risen to become monopoly and 2/3 monopoly firms will compete with each other for consumers.
Boeing and airbus build planes for long haul flights. This type of production has large economies of scale but requires substantial investment in R&D and there are indivisibilities in the production process. It’s a relatively small market and the number of large aircraft sold in a year is modest. This duopoly situation is more favourable for consumers as competition is favourite over an unregulated natural monopoly.
What are the three types of barrier to entry and exit in a monopoly/natural monopoly?
Natural/structural entry barriers: the industry may be a natural monopoly with high entry costs, there are high sunk costs such as money spent on advertising and the purchase of equipment which have no alternative uses (and cannot be sold).
Strategic barriers to entry: these are actions taken by incumbent firms to purposely prevent the entry of new firms into the market. This may include cutting prices so competitors have to leave. It could also include lots of advertising and branding to prevent new firms from taking loyal customers.
Statutory barriers to entry: this can include patterns or legal barriers such as health and safety regulations which may prevent firms from easily entering or exiting a market
What are some characteristics of a natural monopoly?
- huge fixed costs
- Enormous potential for economies of scale
- It is rational for only one firm to supply the entire market, competition is undesirable as it would result in a wasteful duplication of resources and non-exploitation of full economies of scale. This could lead to productive inefficiencies as smaller firms operate at higher avg costs that a single firm.
