monopsony Flashcards
what is a monopsony
single dominant buyer in the market
features of a monopsony
- sellers cannot sell their products to any other firms outside the market
- they are profit maximisers who aim to minimise their costs by paying suppliers the lowest price possible
describe the effect of a monopsony on an equilibrium diagram
PeQe = market equilibrium price and quantity
- monopsonist purchaser wants and gets a lower price of p2
- lower price and lower quantity
when a fixed cost increases…
only the AC curve changes
when a variable cost increases…
both the AC and MC curve changes
impacts of monopsony on suppliers
Receives Lower Price
- The monopsonist uses its bargaining power to negotiate lower prices from suppliers.
- Shifts the suppliers’(AR) and (MR) curves to the left, reducing revenue and profitability.
- Suppliers may no longer achieve supernormal profits and might struggle to cover costs.
- If the price falls below the suppliers’ AVC, they will be forced to shut down, potentially leading to unemployment and reduced supply chain stability.
Loss of Incentive to Improve
- Suppliers may face a lack of motivation to improve product quality or efficiency due to diminished profit margins.
- Lower quality or reduced supply can have knock-on effects on the broader supply chain, leading to inefficiencies and delays.
- This dynamic creates long-term risks to the monopsonist’s own operations and the wider market.
advantages of monopsony on monopsony(firms)
✅ Lower Costs of Production
➡️ Monopsonists are the sole or dominant buyer of labour or goods
➡️ This gives them power to negotiate lower prices from suppliers
➡️ Reduces average and marginal costs of production
➡️ Boosts profitability and potential reinvestment opportunities
✅ Increased Profit Margins
➡️ With lower input costs (e.g. wages or raw materials)
➡️ The firm maintains or raises output prices
➡️ The gap between cost and revenue per unit widens
➡️ Leading to higher supernormal profits
✅ Greater Control Over Labour Market
➡️ Firms with monopsony power over labour (e.g. large employers in a region)
➡️ Can set lower wages than in competitive labour markets
➡️ This allows cost control and limits wage inflation
➡️ Especially valuable during economic downturns
✅ Stability in Supply Chain Costs
➡️ Monopsony power gives firms long-term bargaining ability
➡️ They can establish contracts with favourable terms
➡️ This reduces the volatility of input costs
➡️ Helping firms plan investment and pricing strategies more effectively
advantages of monopsony on consumer
Lower Prices for Consumers
In a monopsony, a single buyer (the firm) can negotiate lower prices from suppliers due to its purchasing power.
This leads to a decrease in costs for the firm, which can result in lower prices for consumers.
Lower prices benefit consumers by increasing their purchasing power.
This could be particularly beneficial in markets for essential goods or services, where cost reduction has a significant impact on consumer welfare.
Improved Product Quality
With the monopsonist’s power over suppliers, there may be increased focus on maintaining or improving product quality to meet the demands of the dominant buyer.
This leads to more efficient production and better-quality products for consumers.
As the monopsonist buys in bulk, they can enforce quality control measures with their suppliers.
Consumers enjoy higher-quality products, which can improve their overall satisfaction.
Increased Efficiency in the Supply Chain
A monopsonist firm may streamline its supply chain by managing supplier relationships more closely.
This leads to more efficient production and distribution, reducing waste and inefficiencies in the market.
Efficient operations can translate to lower operating costs, which can be passed on to consumers as reduced prices.
Consumers benefit from not only lower prices but also from better availability and reliability of goods and services.
Promotes Innovation in Production
Due to its ability to dictate terms, a monopsonist firm may encourage suppliers to innovate or adopt new technologies to meet the buyer’s specifications.
This creates incentives for suppliers to reduce costs and improve production methods.
Technological advancements or innovation may result in cheaper, more advanced products for consumers.
The increased availability of improved products enhances consumer welfare in the long term.
disadvantages of monopsony - monpsony firm
May Cause Reputational Damage
- Exploiting suppliers can result in bad publicity for the monopsonist, especially in cases where small or vulnerable suppliers are harmed.
- Negative press and public backlash could reduce consumer demand, particularly for firms operating in consumer-facing markets.
- This reduces the firm’s market share and long-term profitability.
Inefficiency in Labor Allocation:
A monopsony can lead to firms hiring fewer workers than would be socially optimal, as they can pay below-market wages.
This reduces the total economic output and prevents the efficient allocation of labor resources.
While firms might save money on wages in the short term, they could miss opportunities to expand or improve their products or services.
As a result, economic inefficiency can reduce the firm’s competitive edge in the marketplace.
Reduced Incentives for Innovation:
If firms control the labor market too tightly, they may not need to innovate to attract workers.
As a result, firms may invest less in technology, training, or processes to improve productivity.
This can result in stagnation, as firms are not pressured to adopt best practices or find ways to increase efficiency.
The lack of competitive pressure can ultimately weaken a firm’s ability to adapt to changes in the market or meet consumer demands effectively.
Lack of Competition
- The monopsonist’s dominant position can lead to complacency, reducing its incentive to improve productivity or innovate.
- This lack of competition may result in x-inefficiency, where resources are not used optimally, increasing production costs over time.
- Dynamic inefficiency could eventually undermine the firm’s long-term competitiveness.
Regulatory Scrutiny
- Monopsonists may face legal or regulatory challenges due to their abuse of market power.
- Investigations or fines from regulatory bodies increase costs and can hinder the firm’s growth.
- If stricter regulations are imposed, the monopsonist may lose some of its market power, reducing profitability.
disadvantages of monopsony on consumers
Reduced Product Quality
- Suppliers, constrained by lower revenues, may cut corners on product quality to maintain profitability.
- This reduction in quality can directly harm consumers who rely on goods or services from the monopsonist’s supply chain.
- In extreme cases, the market may face a shortage of goods if suppliers cannot sustain production.
No Guarantee of Lower Prices
- While monopsonists benefit from lower costs, there is no certainty that these savings will be passed on to consumers.
- Monopsonists may instead use their market power to maintain high prices, leading to allocative inefficiency and reduced consumer surplus.
- In such cases, consumers bear the cost of the monopsonist’s profit maximization.
Monopsony leads to lower wages for workers 🛠️
A monopsony is a market where there is only one buyer (employer) of labor, which allows the employer to set wages lower than in a competitive market.
This reduces workers’ income, which can lower their purchasing power.
Lower wages for workers lead to a decrease in their ability to consume goods and services.
This ultimately results in lower demand in the economy, impacting overall consumption.
disadvantages of monopsony (general economic effects)
Supply Chain Disruptions
- Over time, suppliers leaving the market due to unsustainably low prices can lead to supply chain disruptions.
- This harms the broader economy, as industries dependent on these suppliers face higher costs or reduced access to inputs.
- Long-term economic efficiency is undermined, slowing overall growth and development.
Market Power Concentration
- Monopsony power contributes to increasing market concentration, reducing competition at various stages of the supply chain.
- This concentration may deter new entrants and innovation, limiting economic dynamism.
- If monopsony power becomes systemic, it can exacerbate wealth inequality, as benefits accrue disproportionately to the monopsonist.
how can increased market competition reduce monopsony power
Entry of New Buyers
- If new firms enter the market, they increase demand for inputs, creating competition among buyers for suppliers.
- This reduces the ability of any single firm to dictate prices or terms to suppliers.
- Suppliers benefit from higher prices and better contract terms, improving their profitability, also minimizes market distortions caused by monopsony power.
Increased Supplier Bargaining Power
- Greater competition among firms may strengthen suppliers’ positions as they can now negotiate better deals or switch to alternative buyers.
- Suppliers are less likely to accept below-cost prices when they have multiple options.
- Monopsony firms lose leverage, potentially increasing costs for buyers but ensuring a more equitable distribution of profits along the supply chain.
Diversification of Supply Sources
- Market competition often encourages firms to diversify their supply base. By creating a more competitive supply market, monopsony firms lose their unique position, and power becomes more evenly distributed.
- This leads to a more competitive and dynamic market structure, reducing inefficiencies and promoting innovation among suppliers.
