Unit 3: Monopsony

Question 1

What is a (pure) Monopsony?

Answer 1

A monopsony is a firm which is the sole buyer of resources or suppliers.
There is a single buyer in the market.

Question 2

What is meant by Monopsony Power?

Answer 2

A monopsonist has buying power in their market.

This buying power means that a monopsonist can exploit their bargaining power with a supplier to negotiate lower prices. The reduced cost of purchasing inputs increases their profit margins.
Many firms have some degree of monopsony power, which means firms have some control over their suppliers

A firm with monopsony power is able to negotiate lower prices, because their suppliers have nowhere else to sell to (there is only one buyer). They are also able to set the market price.

(suppliers accept it because the firm is well respected; and the quantity sold is huge- imagine McDonalds; big businesses can influence cheaper supply)

Question 3

What is an assumption about Monopsonies?

Answer 3

It is assumed that monopsonists are profit maximisers.

They aim to minimise costs by paying suppliers the lowest possible price.

Monopsonists will pay lower prices to suppliers than if the market was competitive but suppliers will also supply less to the market.

Question 4

What are some examples of Industries where Monopsony power exists/persists?

Answer 4

1. Electricity Generators can negotiate lower prices for coal + gas supply
2. Leading supermarkets have oligopsony power when it comes to purchasing products from businesses at earlier stages of the supply chain (meat + poultry farmers, milk producers, etc.)
3. Low-cost airlines get a favourable price when purchasing a new fleet of aircraft
4. Amazon’s buying power in the retail book market- it gets a better price than booksellers; giving it a competitive advantage
5. The increasing buying power of countries - e.g. China - securing deals to buy mineral deposits from other countries (often LEDCs in Africa)

Question 5

What are the possible Advantages gained from Monopsony Power?

Answer 5

1. Improved value for money; allowing an increase in productivity. Also, lower buying costs might be passed on to the customer in retail prices
2. Lower input costs can raise profitability that can fund investment/ research +development
3. The growth of the fair trade label and organisation is evidence of how pressure from consumers can lead to improved contracts and prices for farmers in developing countries – this increase in inome and profit will have important economic and social benefits of exporting industry
4. Monopsony Power can give power to buyers in the face of monopoly supply or resources. For sample, cosmetic produces (e.g. L’Oreal) can charge very high prices for their products, but supermarkets good for supplies to cut their costs

Question 6

What are the Costs of a Monopsony?

Answer 6

1. Suppliers can be squeezed out of business - The price may be so low that they can’t cover their costs, forcing it out of the market
2. Choice for consumers could be limited, as monopsony acts as a barrier to entry for new firms
3. Higher profits from monopsonies can mean inequality - they make higher profit, new firms can’t compete as much, and so miss out on power