Monopsony

Question 1

What is a monopsony

Answer 1

When there is one dominant buyer and many sellers in the market

Question 2

Give examples of monopsonies

Answer 2

NHS
Tesco
NASA
TFL

Question 3

What are monopsonies able to do to the prices they pay for suppliers and why

Answer 3

Monopsonies have price setting ability and can threaten to buy from other suppliers if they deem that prices are too high

Question 4

Advantages and disadvantages of monopsonies

Answer 4

Advantages:
1.Lower Prices for Consumers (via Lower Costs)
A monopsonist can use its buying power to negotiate lower prices from suppliers.
→ This reduces the firm’s input costs.
→ If the market is competitive downstream (e.g. retail), some of these cost savings may be passed on as lower prices for consumers.
→ Leads to a gain in consumer surplus and improved allocative efficiency.

2.Cost Savings Can Improve Productive Efficiency
Buying in bulk and driving hard bargains allow the firm to reduce average costs.
→ These savings can be reinvested into the business.
→ This boosts productive efficiency and may increase profit margins or support lower pricing strategies.

3.Helps Control Public Sector Spending (e.g. NHS)
When the government is a monopsonist (e.g. in healthcare or defence), it can use its power to limit overcharging by suppliers.
→ Taxpayer money is used more efficiently.
→ This supports fiscal responsibility and ensures better value for public services.

4.May Encourage Supplier Efficiency
Suppliers forced to accept lower prices may be incentivised to cut costs, streamline operations, or innovate to stay profitable.
→ This may improve efficiency in the supply chain over time.
→ Especially effective in sectors with high competition between suppliers.

Disadvantages:
1. Exploitation of Suppliers
A powerful monopsonist can force suppliers to accept very low prices.
→ This squeezes supplier profit margins, especially smaller or less powerful ones.
→ Can lead to underinvestment, job losses, or exit from the market.
→ Damaging in agriculture or small-scale manufacturing.

2. Lower Wages for Workers in Monopsonised Labour Markets
   In labour markets (e.g. NHS, Amazon warehouses), a monopsonist can offer below-market wages.
   → Workers have few alternative employers, so take-it-or-leave-it conditions emerge.
   → Leads to lower real incomes, reduced worker motivation, and inequality.
3. Reduced Supply Chain Investment
   With reduced profit margins, suppliers may cut back on R&D, training, or capital investment.
   → Over time, this lowers dynamic efficiency and reduces quality or innovation in the industry.
   → Long-term damage to product standards or productivity.