Impact of a monopsony in a supermarket industry

Question 1

Knowledge Marks of a Monopsony

Answer 1

oSingle dominant buyer
oBargaining power
oIdentification of monopsony abuse (forcing suppliers to sell at lower prices to minimise cost and maximise profits
oExplain why suppliers are forced to have low prices

Question 2

KAA1 - Cost to the supplier

Answer 2

o Lower price (Monopoly Bargaining Power)- Less producer surplus
o Less revenue
o Sometimes high cost as well due to extra cost- Packaging may be put upon them by monopsony firm
o Less supernormal profits
o Less finance for reinvestment
*Decrease in product development (Give examples)
*Decrease in dynamic efficiency (examples)

o Cutting on cost
*Delaying their deliveries
*Cutting down on quality
*Lay off workers
o Reaching shutdown point (AR=AVC)- Leaving industry
*Cost to workers (Optional, according to question)
*Wage cuts
*Job losses

Question 3

Eval 1 - Govt intervention to reduce monopsony power

Answer 3

oGovernment intervention to reduce monopsony power
§Reduce barriers to entry- Increase competition and contestability
§Laws and regulations- Fines
§Protecting suppliers and employees
*Minimum price for suppliers
*Minimum wage for workers (Optional,
according to question)
o Suppliers may come together (trade union)- Bilateral monopolyoffset monopsony effect

oBenefit to the supplier- Suppliers have a major buyer
improving revenue (Optional)
§Long term investment decisions
§Profit

Question 4

KAA2 - Cost to consumers

Answer 4

• Cost to consumers
  o Variety decreases, due to low contestability
• Some suppliers may leave
  industry
  o Quality decreases
• Poor quality as suppliers
  have low profits they will cut
  down on quality
  o Monopsony power may
  result in monopoly power-increase prices for
  consumers

Question 5

Eval2 - Benefit to consumers

Answer 5

Evaluation 2–
o Lower cost can be passed on
consumers- Lower prices -
Increase consumer surplus