LS15 : Monopsony & Natural Monopoly Flashcards
what is a monopsony?
a single buyer of a good or service
what is an example of a monopsony in the UK?
the government when purchasing military equipment
what is monopsony power?
if a producer has only one or a few buyers, this means the buyer is likely to have significant amount of bargaining power over price and other factors. this means that buyers are more likely to be successful when seeking price reductions.
what happens to supply if there is a monopsonist in the market?
monopsonist has large bargaining power so price and output are lower than under competitive conditions
what is an example of monopsony power in the UK?
leading UK supermarkets
why do UK supermarkets have monopsony power?
supermarkets have great leverage over producers since there is an abundance of producers (eg. 300 mushroom suppliers). the producers need supermarkets more than the supermarkets need them.
what is the impact on suppliers (eg. mushroom farmers) of monopsonies?
lower price compared to competitive conditions —> lower revenue and profit —> more likely to make losses —> more likely to leave the market
- greater pressure to reduce costs
- suppliers more likely to reduce quality to lower costs
- tougher non-price conditions often imposed
- opportunity for long term contracts with major buyers can be lucrative
- developing a solid relationship with a major buyer can remove uncertainty
- buyer / seller rs may be harmonious and not exploitative
what is the impact on monopsonists (eg. tesco) of monopsonies?
- lower prices compared to competitive conditions (higher revenue and profit)
- likely to receive perks from suppliers such as payments to ensure products appear in all locations
- product quality may fall if suppliers reduce quality in response to cost pressure, so Tesco supplying bad products
what is the impact on consumers of a monopsonist?
- lower prices and higher consumer surplus
- monopsonists can counter firms with monopoly power
- supply may be constrained due to lower prices received by suppliers
- choice may be constrained
what is the impact on workers of a monopsony?
lower prices —> suppliers reduce output —> less workers needed
- suppliers may worsen working conditions to reduce production costs
what is a natural monopoly?
occurs when the most efficient number of firms in the industry is one
why is there only one firm in a natural monopoly?
typically has substantial fixed costs of production but low marginal costs meaning it is impractical to have more than one firm producing the good.
explain the cost-revenue graph of a natural monopoly.
firm enjoys economies of scale up to limit of market demand (AR=D). new entrants will be operating at a lower scale, so will face higher average costs. existing firm will always be able to price such firms out of the market. economies of scale act as an effective barrier to entry.
why is the LAC curve in a natural monopoly the shape it is?
continuous curve downwards since average costs will continuously fall with output
what is the defining feature of a natural monopoly?
average costs fall continuously with output
