Micro 23 - Monopsony

Question 1

What is a monopsony?

Answer 1

A monopsony occurs where there is a sole buyer of a good

Question 2

When does monopsony power exist?

Answer 2

Monopsony power exists when sellers face powerful buyers. Monopsony power is normally strongest when there is a single buyer in the market buying from small suppliers who sell homogenous products

Question 3

What are the two main benefits of monopsonies?

Answer 3

• Lower costs: This sort of power may allow a firm to exploit its suppliers in the knowledge that the supplier has few options beyond selling to the sole buyer. The monopsonist benefits from high levels of purchasing economies of scale. Lower prices may mean more SNP for dynamic efficiency
• Lower prices: Lower prices can be passed onto the consumer increasing consumer surplus

Question 4

What are the drawbacks of monopsonies?

Answer 4

• Quality: The supplier may have to cut corners or lower quality to lower its costs to remain profitable
• Less investment: As the supplier’s profits are squeezed they may struggle to invest in new technology hindering their ability to be internationally competitive
• Less supply: Lower prices lowers incentives to supply. If the prices are set so low then the supplier may go out of business which is harmful to the monopsonist

Question 5

What are the three ways businesses can reduce the power monopsonists have over them?

Answer 5

• Grow larger
• Suppliers could organise themselves into a group to bargain for higher prices against a monopsonist buyer. Eg. Arla is a European dairy co-operative of 12000 dairy farmers around 2500 of whom are in the UK who act to ensure farmers get fair prices for milk and dairy products
• Pressure from consumers: The growth of fair trade in recent years has been largely driven by pressure from consumers to provide farmers in developing countries a fair price for their products. For example fair trade has provided tea farmers in Rwanda with fair prices