monopsony Flashcards
(14 cards)
what is a monopsony
single dominant buyer in the market
features of a monopsony
- sellers cannot sell their products to any other firms outside the market
- they are profit maximisers who aim to minimise their costs by paying suppliers the lowest price possible
describe the effect of a monopsony on an equilibrium diagram
PeQe = market equilibrium price and quantity
- monopsonist purchaser wants and gets a lower price of p2
- lower price and lower quantity
when a fixed cost increases…
only the AC curve changes
when a variable cost increases…
both the AC and MC curve changes
impacts of monopsony on suppliers
Receives Lower Price
- The monopsonist uses its bargaining power to negotiate lower prices from suppliers.
- Shifts the suppliers’(AR) and (MR) curves to the left, reducing revenue and profitability.
- Suppliers may no longer achieve supernormal profits and might struggle to cover costs.
- If the price falls below the suppliers’ AVC, they will be forced to shut down, potentially leading to unemployment and reduced supply chain stability.
Loss of Incentive to Improve
- Suppliers may face a lack of motivation to improve product quality or efficiency due to diminished profit margins.
- Lower quality or reduced supply can have knock-on effects on the broader supply chain, leading to inefficiencies and delays.
- This dynamic creates long-term risks to the monopsonist’s own operations and the wider market.
advantages of monopsony on monopsony(firms)
✅ Lower Costs of Production
➡️ Monopsonists are the sole or dominant buyer of labour or goods
➡️ This gives them power to negotiate lower prices from suppliers
➡️ Reduces average and marginal costs of production
➡️ Boosts profitability and potential reinvestment opportunities
✅ Increased Profit Margins
➡️ With lower input costs (e.g. wages or raw materials)
➡️ The firm maintains or raises output prices
➡️ The gap between cost and revenue per unit widens
➡️ Leading to higher supernormal profits
✅ Greater Control Over Labour Market
➡️ Firms with monopsony power over labour (e.g. large employers in a region)
➡️ Can set lower wages than in competitive labour markets
➡️ This allows cost control and limits wage inflation
➡️ Especially valuable during economic downturns
✅ Stability in Supply Chain Costs
➡️ Monopsony power gives firms long-term bargaining ability
➡️ They can establish contracts with favourable terms
➡️ This reduces the volatility of input costs
➡️ Helping firms plan investment and pricing strategies more effectively
advantages of monopsony on consumer
Lower Prices for Consumers
In a monopsony, a single buyer (the firm) can negotiate lower prices from suppliers due to its purchasing power.
This leads to a decrease in costs for the firm, which can result in lower prices for consumers.
Lower prices benefit consumers by increasing their purchasing power.
This could be particularly beneficial in markets for essential goods or services, where cost reduction has a significant impact on consumer welfare.
Improved Product Quality
With the monopsonist’s power over suppliers, there may be increased focus on maintaining or improving product quality to meet the demands of the dominant buyer.
This leads to more efficient production and better-quality products for consumers.
As the monopsonist buys in bulk, they can enforce quality control measures with their suppliers.
Consumers enjoy higher-quality products, which can improve their overall satisfaction.
Increased Efficiency in the Supply Chain
A monopsonist firm may streamline its supply chain by managing supplier relationships more closely.
This leads to more efficient production and distribution, reducing waste and inefficiencies in the market.
Efficient operations can translate to lower operating costs, which can be passed on to consumers as reduced prices.
Consumers benefit from not only lower prices but also from better availability and reliability of goods and services.
Promotes Innovation in Production
Due to its ability to dictate terms, a monopsonist firm may encourage suppliers to innovate or adopt new technologies to meet the buyer’s specifications.
This creates incentives for suppliers to reduce costs and improve production methods.
Technological advancements or innovation may result in cheaper, more advanced products for consumers.
The increased availability of improved products enhances consumer welfare in the long term.
disadvantages of monopsony - monpsony firm
May Cause Reputational Damage
- Exploiting suppliers can result in bad publicity for the monopsonist, especially in cases where small or vulnerable suppliers are harmed.
- Negative press and public backlash could reduce consumer demand, particularly for firms operating in consumer-facing markets.
- This reduces the firm’s market share and long-term profitability.
Inefficiency in Labor Allocation:
A monopsony can lead to firms hiring fewer workers than would be socially optimal, as they can pay below-market wages.
This reduces the total economic output and prevents the efficient allocation of labor resources.
While firms might save money on wages in the short term, they could miss opportunities to expand or improve their products or services.
As a result, economic inefficiency can reduce the firm’s competitive edge in the marketplace.
Reduced Incentives for Innovation:
If firms control the labor market too tightly, they may not need to innovate to attract workers.
As a result, firms may invest less in technology, training, or processes to improve productivity.
This can result in stagnation, as firms are not pressured to adopt best practices or find ways to increase efficiency.
The lack of competitive pressure can ultimately weaken a firm’s ability to adapt to changes in the market or meet consumer demands effectively.
Lack of Competition
- The monopsonist’s dominant position can lead to complacency, reducing its incentive to improve productivity or innovate.
- This lack of competition may result in x-inefficiency, where resources are not used optimally, increasing production costs over time.
- Dynamic inefficiency could eventually undermine the firm’s long-term competitiveness.
Regulatory Scrutiny
- Monopsonists may face legal or regulatory challenges due to their abuse of market power.
- Investigations or fines from regulatory bodies increase costs and can hinder the firm’s growth.
- If stricter regulations are imposed, the monopsonist may lose some of its market power, reducing profitability.
disadvantages of monopsony on consumers
Reduced Product Quality
- Suppliers, constrained by lower revenues, may cut corners on product quality to maintain profitability.
- This reduction in quality can directly harm consumers who rely on goods or services from the monopsonist’s supply chain.
- In extreme cases, the market may face a shortage of goods if suppliers cannot sustain production.
No Guarantee of Lower Prices
- While monopsonists benefit from lower costs, there is no certainty that these savings will be passed on to consumers.
- Monopsonists may instead use their market power to maintain high prices, leading to allocative inefficiency and reduced consumer surplus.
- In such cases, consumers bear the cost of the monopsonist’s profit maximization.
Monopsony leads to lower wages for workers 🛠️
A monopsony is a market where there is only one buyer (employer) of labor, which allows the employer to set wages lower than in a competitive market.
This reduces workers’ income, which can lower their purchasing power.
Lower wages for workers lead to a decrease in their ability to consume goods and services.
This ultimately results in lower demand in the economy, impacting overall consumption.
disadvantages of monopsony (general economic effects)
Supply Chain Disruptions
- Over time, suppliers leaving the market due to unsustainably low prices can lead to supply chain disruptions.
- This harms the broader economy, as industries dependent on these suppliers face higher costs or reduced access to inputs.
- Long-term economic efficiency is undermined, slowing overall growth and development.
Market Power Concentration
- Monopsony power contributes to increasing market concentration, reducing competition at various stages of the supply chain.
- This concentration may deter new entrants and innovation, limiting economic dynamism.
- If monopsony power becomes systemic, it can exacerbate wealth inequality, as benefits accrue disproportionately to the monopsonist.
how can increased market competition reduce monopsony power
Entry of New Buyers
- If new firms enter the market, they increase demand for inputs, creating competition among buyers for suppliers.
- This reduces the ability of any single firm to dictate prices or terms to suppliers.
- Suppliers benefit from higher prices and better contract terms, improving their profitability, also minimizes market distortions caused by monopsony power.
Increased Supplier Bargaining Power
- Greater competition among firms may strengthen suppliers’ positions as they can now negotiate better deals or switch to alternative buyers.
- Suppliers are less likely to accept below-cost prices when they have multiple options.
- Monopsony firms lose leverage, potentially increasing costs for buyers but ensuring a more equitable distribution of profits along the supply chain.
Diversification of Supply Sources
- Market competition often encourages firms to diversify their supply base. By creating a more competitive supply market, monopsony firms lose their unique position, and power becomes more evenly distributed.
- This leads to a more competitive and dynamic market structure, reducing inefficiencies and promoting innovation among suppliers.
how to restruct monopsony power
🧑⚖️ 1. Stronger Trade Unions
A stronger trade union → can negotiate higher wages and better conditions for workers → this reduces the wage-setting power of the monopsonist → leading to fairer wages and potentially higher employment if workers are more productive.
🏛️ 2. Government Minimum Wage Legislation
Government introduces a minimum wage above the monopsony wage → forces the firm to pay a higher wage than they would otherwise → reduces exploitation of workers and may increase employment up to the competitive level → improves allocative and social efficiency.
📈 3. Promoting Labour Market Mobility
Government increases access to training and transport → workers are more mobile and can seek alternative employers → reduces the monopsonist’s control over local labour → encourages competition for labour and fairer pay.
🏢 4. Encouraging Market Entry (Product Market)
Policies to reduce barriers to entry (e.g. deregulation, tax incentives) → more buyers of the input/labour enter the market → reduces the dominance of the single buyer (monopsonist) → more competitive outcomes and higher prices paid to suppliers/workers.
📜 5. Regulation and Oversight
Regulators monitor monopsonistic firms (e.g. supermarkets or tech giants) → firms found to be exploiting suppliers or workers face fines or restrictions → incentivises fairer practices → leads to more equitable outcomes and may support long-run sustainability.
💸 Fines from the Groceries Code Adjudicator (GCA)
Supermarkets with monopsony power may delay payments or impose unfair terms on suppliers
→ The GCA can impose fines up to 1% of annual revenue to penalise such behaviour
→ This raises the cost of exploiting monopsony power
→ Incentivises supermarkets to treat suppliers fairly, improving efficiency and supplier sustainability ✅
🕒 Regulation for Timely Payments
Suppliers often face cash flow issues due to delayed payments by dominant buyers
→ Introducing a regulation to enforce standard payment terms ensures quicker payments
→ This improves supplier liquidity and stability
→ Reduces risk of supplier exit and strengthens the supply chain over time ✅
📈 Price Regulation (e.g. Minimum Prices)
Monopsonies can push prices below fair market value, harming suppliers’ profits
→ Minimum pricing ensures suppliers receive a fairer, cost-reflective return
→ This improves investment incentives and quality of production
→ Leads to better long-term supply, reducing market failures like underprovision ✅
🛍️ Promote New Entrants in Retail Sector
A concentrated retail market allows few buyers to dominate supplier terms
→ Policies encouraging entry (e.g. tax breaks or reduced barriers to entry) can increase buyer competition
→ Suppliers gain alternative outlets for their goods, reducing dependency on one firm
→ Weakens monopsony power and enhances overall market efficiency ✅
🔒 Blocking Mergers That Increase Buyer Power
Mergers between large buyers may significantly increase their monopsony power
→ CMA intervention to block such deals maintains a diverse buyer base
→ This prevents the exploitation of suppliers through reduced choice
→ Helps sustain competitive pressure in both buying and selling markets ✅
EV points for trying to restrict monopsony power
🧠 It depends on the accuracy of information (Asymmetric Information)
If regulators don’t have full insight into supermarket-supplier dynamics
→ They may set fines or regulations that are either too harsh or too lenient
→ This risks overregulation (reducing efficiency) or underregulation (allowing abuse to continue)
→ Effectiveness of intervention depends on quality and transparency of market data 🔍
🏢 It depends on risk of regulatory capture
A former employee or close relationship with supermarkets may bias the regulator
→ Regulations may be shaped to suit the interests of powerful firms
→ This reduces effectiveness of reform and keeps supplier exploitation in place
→ Independent oversight is crucial to avoid capture and preserve fairness 🧾
🧑💼 It depends on regulator’s resources
Investigating large supermarkets requires time, staff, and funding
→ If the regulator is underfunded, investigations will be infrequent or weak
→ Monopsony power might persist due to lack of deterrence
→ Greater budget and training may be necessary for effective enforcement 💰
🙊 It depends on supplier willingness to report
Suppliers may fear being delisted or punished for speaking out
→ This leads to underreporting of abuse, giving the regulator an incomplete picture
→ Makes it harder to design and enforce effective rules
→ Anonymous whistleblowing protections might be needed to overcome this 📢
🧩 It depends on how CMA interprets competition
The CMA may approve mergers on the basis of consumer prices, not buyer power
→ This could lead to greater monopsony power even if product markets stay competitive
→ Supplier exploitation could worsen, undermining government reform intentions
→ CMA must consider both consumer and supplier impacts ⚖️
🌾 It depends on complementary policies like subsidies
Minimum pricing or fines might not be enough on their own
→ Direct subsidies to suppliers (e.g. farmers) can stabilise incomes without distorting prices
→ This supports long-term viability of domestic production
→ The right mix of tools improves overall effectiveness 🧺
🍽️ It depends on unintended consequences of minimum prices
If set above market equilibrium, minimum prices may lead to overproduction
→ This causes food surpluses, storage costs, or waste
→ Creates inefficiencies unless paired with output limits or guaranteed purchasing schemes
→ Policy design must consider demand elasticity and enforcement 📉
