Monopsony Flashcards
What is a monopsony and how does it work?
A monopsony is where there are many sellers but only one buyer. In reality this occurs rarely, more often a few firms have a "degree of monopsony power" or come together to act as a monopsonist. Monopsonists are (almost) always firms, buying in stock/raw materials/labour. (The Big 4 supermarkets). Their aim is to get as low a price as possible and so reduce costs, so they pay below "market price". The sellers only have two choices - refuse to sell at this low price and go out of business as they lose their customer or sell at this price anyway and make no/very low profits.
What does the monopsony model look like? (Beyond the syllabus)
The buyer decides what price to pay by looking at MC=MR and then the AC curve to see what min price the seller could accept and not go out of business. This means the seller only makes normal profits.
Diagram:
Monopsony
D (MRP) marginal revenue product curve, slanting downwards
S (AC) average costs of the buyer are the supply of the seller
MC above AC
MC=MR is the equilibrium
Who gains in a monopsony?(2)
The monopsonist gains with lower purchasing costs, greater market share, if result is lower prices to consumers and increased producer surplus and profit.
The ‘final consumer’ gains with improved value for money, increased consumer surplus if lower costs are passed on. The increased profits may be invested into the firm to produce better products in the future.
What are the problems with monopsonies?(5)
- Lower prices paid will lead to less being supplied to the monopsonist which may constraint supply
- May result in more regulation for the monopsonist
- Less profit for supplier may result in less investment meaning a lower quality product and even a LR fall in supply/increase in prices
- It depends on whether the monopsonist passes on the benefits in the form of lower prices/higher investment
- It depends on the market, e.g. is there also a monopoly, objectives of the monopsony etc.
