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)
Pays Lower Price, Reducing Variable Costs
- Monopsonists benefit from lower input costs,reduces their overall variable costs.
This reduction decreases the firm’s (AC) and (MC), increasing supernormal profits.
- This financial advantage allows the monopsonist to grow, consolidate its market power, and maintain profitability even during periods of reduced demand.
Achieves Productive Efficiency
- By minimizing input costs, the monopsonist ensures it produces at the lowest point on its AC curve.
- Lower costs improve the firm’s ability to compete in the market, and achieving productive efficiency supports long-term profitability.
- This productive efficiency can further attract investors and solidify its position as a dominant buyer.
Dynamic Efficiency Through Supernormal Profits
- The monopsonist can reinvest its supernormal profits into R&D, innovation, or cost-saving technologies.
- Over time, such investments can lead to better-quality products, process improvements, and long-term competitiveness.
- This benefits the monopsonist by increasing its efficiency and market appeal, potentially capturing greater consumer demand.
Purchasing Economies of Scale
- By buying in bulk, the monopsonist benefits from purchasing economies of scale, lowering per-unit costs.
- These cost savings enhance profitability and can be used to either undercut competitors or expand market presence.
- The monopsony becomes more resilient to economic fluctuations and external shocks.
advantages of monopsony on consumer
Pays Lower Prices
- Monopsonist may pass on cost savings to consumers in the form of lower prices for goods and services.
- Lower prices increase consumer surplus, as consumers pay less while enjoying the same or higher quantities of goods.
-Improves consumer welfare, particularly for low-income households that benefit from affordability.
Achieves Allocative Efficiency
- With reduced costs, the monopsonist can allocate resources efficiently, supplying goods at a price and quantity that closely meets societal needs.
- Allocative efficiency ensures resources are used optimally, improving economic welfare for all agents.
- Consumers gain access to affordable goods, but this depends on the monopsonist’s pricing strategy.
Dynamic Efficiency Benefits Consumers
- Supernormal profits may enable the monopsonist to innovate and improve product quality.
- This leads to better, more advanced goods that enhance consumer experiences and meet evolving preferences.
- In the long run, consumers benefit from increased product variety and innovation in the market.
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.
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.
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.
