Monopsony

Question 1

Monopsony definition

Answer 1

a single buyer of a good or service

e.g. government is a monopsony for buying military equipment

Question 2

a monopsonist has a large amount of bargaining power =

Answer 2

price and output than under competitive conditions

Question 3

monopsony power

Answer 3

when a buyer has a significant amount of power over suppliers to a small numbers of sellers in the market

Question 4

monopsony in labour markets

Answer 4

• sole employer
• wage makers
• will maximise revenues from workers by hiring up to MRP = MC1
• monopsonist reduces wages and employment compared to competitive labour markets

Question 5

impact on other suppliers

Answer 5

• lower prices compared to comp = lower rev + profit = more likely to make losses = leave
• greater pressure to reduce costs
• suppliers more likely to reduce quality lower costs

Question 6

impact on monopsonists

Answer 6

• lower prices compared to competitive = higher revenue = higher profit
• more likely to receive perks from suppliers such as payments to ensure suppliers products appear in all store/ locations

Question 7

impact on consumers

Answer 7

• if monopsonists passes on some of costs savings, lower prices and higher CS
• monopsonists can country firms with monopoly power
• supply can be constrained due to lower prices received by suppliers
• constrained choice if suppliers are forced out

Question 8

impact of workers

Answer 8

• lower prices = suppliers reduce output = less workers needed
• reduction in costs may lead to less jobs, may worsen working conditions - not follow health standards

Question 9

Benefits to firms:

Answer 9

1. Monopsony power allows firms to achieve purchasing economies of scale leading to lower average costs.
2. Lower purchase costs bring about higher profits and increased returns for shareholders.
3. The extra profit might be used to find capital investment or research and development.

Question 10

Benefits to consumers:

Answer 10

1. Consumers gain from lower prices e.g. supermarkets negotiate better prices from manufacturers that are then passed on to consumers.
2. Improved value for money – for example the NHS can use its bargaining power to cut the prices of drugs used in treatments. Cost savings allow for more treatments within the NHS budget.

Question 11

Drawbacks from monopsony power

Answer 11

1. Businesses may use their buying power to squeeze lower prices out of suppliers. This reduces the profits of firms in the supply chain and causes lower incomes.
2. A recent example has been the battle of milk farmers to get a higher price from supermarkets that covers the average cost of their milk (i.e. avoid subnormal profits, threat of closure).
3. Consumers might be faced with less choice or higher prices in long run if some suppliers leave the mark

Question 12

Impact on employees

Answer 12

● The supplier will sell less goods and so employ less people, whilst the monopsonist may employ fewer, more or the same amount of people since they have less inputs to use for production but their costs are also lower.
● Monopsonists may pay​ higher wages​ as they are making higher profits

Question 13

Impact on suppliers

Answer 13

● Suppliers will lose out as they will ​receive lower prices​; less will be supplied leading to some firms leaving the market