LS15- Monoposony & Pure Monopoly

Question 1

Monopsony definition + e.g.

Answer 1

• when a single buyer controls the market for a particular good or service, in essence setting price and quality levels, normally because without the buyer there would not be sufficient demand for the product to survive
• e.g. the government purchasing military equipment in the UK

Question 2

e.g. Tesco, 3 points + eval for 3rd

Main impacts of being a monopsonist

Answer 2

• they have a large amount of bargaining power -> lower price than under competitive conditions -> higher profits
• more likely to receive perks from supplier such as payments to ensure suppliers products appear in all stores
• suppliers may lower quality in response to cost pressures placed on them by monopsonists (EVAL: firms may switch suppliers if this is the case)
• CMA may intervene by fining or setting minimum prices for suppliers

Question 3

Factors increasing the likelihood of there being monopsony power

Answer 3

• the concentration of a market - how many firms/big buyers there are
• evidence of suppliers’ profits decreasing - some suppliers may even shut down
• consumers benefiting from lower prices

Question 4

Factors that limit monopsony power/suggest that monopsony power is not high

Answer 4

• the size of the supplier e.g. tesco cannot exert monopsony power on coke as coke do not rely on tesco for their revenue
• suppliers could merge as they now have a larger market share and there would be less alternatives (more monopoly power)
• suppliers lowering profits may due to poor business governance and not monopsony power

Question 5

Impact of monopsonists on suppliers + eval

Answer 5

• lower prices compared to competitive conditions -> lower revenues and profit -> more likely to make a loss -> more likely to shutdown
• greater pressure to reduce costs (this can be seen as positive for the economy as a whole) - may lead to fall in quality though
• opportunity for making long-term contracts with major buyers can be lucrative
• eval - suppliers may merge to counter monopsony power
• eval - food suppliers may increase efficiency
• eval - market may not be a monopsony
• eval - CMA may intervene

Question 6

Impact of monopsonists on consumers

Answer 6

• If monopsonists pass on cost savings, lower prices and higher consumer surplus - monopsonists may form a cartel and price fix
• monoposonists can counter firms with monopoly power
• choice and supply may be constrained if suppliers are forced out of the market and pressured to lower prices

Question 7

Barrier to entry

Answer 7

• any obstacle that prevents a new firm from entering a market

Question 8

Types of barriers to entry - Lloyds TSB

Answer 8

• L - legal
• T - technical
• S - strategic
• B - brand loyalty

Question 9

Legal (statutory) barriers to entry

Answer 9

• patents
• licenses/permits
• red tape (excessive paperwork)
• standards & regulations
• insurance

Question 10

Technical (structural) barriers to entry

Answer 10

• start-up costs
• sunk costs e.g. advertising & specialist machinery
• economies of scale

Question 11

Strategic barriers to entry

Answer 11

• predatory pricing
• limit pricing (normal profit price -> no SN profit incentive to enter market)
• heavy advertising

Question 12

Barrier to exit

Answer 12

• any obstacle that prevents a firm leaving a market

Question 13

What are the barriers to exit?

Answer 13

• under valuation of assets
• redundancy costs (to staff)
• penalties for leaving contracts early
• sunk costs

Question 14

Sunk costs definition

Answer 14

• a sunk cost is a cost that has already been incurred and cannot be recovered