Monopsony

Question 1

What are the characteristics of monopsony?

Answer 1

1. only 1 buyer in the market (NHS and Doctors)
2. has control over wage/supply as it is the dominant buyer

Question 2

Explain how monopsony power lead to lower prices

Answer 2

A monopsony has bargaining power in the market,

They can use their power to negotiate for lower prices for raw mats

Variable cost decreases, COP lowers, MC and AC decreases, ATC decreases

IF firm is competitive OR PED elastic, they will lower prices

lower prices increase consumer surplus and economic welfare (assume price is big component of welfare)

Question 3

Benefits and Costs of monopsony to firms

Answer 3

1. More profit (lower cost)
2. More dynamic efficiency
3. Supply shortage in LR
4. Low productivity (if workers are unhappy from low pay)

Question 4

Benefits and Costs of monopsony to Consumers

Answer 4

1. Higher consumer welfare
2. Improved value of money (eg NHS cutting drug cost to allow more treatments within budget -> more accessibility for consumers)
3. Lower consumer welfare in LR if suppliers leave the market (increase in price from supply shortage)
4. Decrease quality due to decrease RnD from suppliers (drug companies supplying NHS)

Question 5

Benefits and Costs of monopsony to Employees and Suppliers

Answer 5

1. Stable demand from monopsony (guarantee buyers)
2. Reduces profit/wage for supply chain/workers due to high bargaining power/large market share