3.4.6 + 3.4.7 Monopsony, Contestability

What is a monopsony

A market situation in which there is only one buyer.

Characteristics of a monopsony

- buying and negotiating power in the market

- exploit bargaining power to negotiate lower prices

- reduced cost of purchasing inputs - increases profit margins

Examples of monopsony

the NHS and nurses

UK government for military equipment

Exam technique CoR

How does monopsony power impact consumer welfare

(read)

Monopsony has buying and bargaining power. For example, retailers have power when purchasing supplies. Monopsonies in theory can use their purchasing power to negotiate lower prices for factor inputs. As a result, their variable costs of production will lower so lower marginal and average total costs. If they are rpofit maximising, there is a lower equilibrium price. Final consumers benefit from lower prices and increases consumer surplus and economic welfare. Assumed that price paid by the consumer is the main determinant of the welfare

Benefits of monopsony power (firms)

- purchase economies of scale, lower average costs

- lower purchase costs, higher profits, increased returns for shareholders

- extra profit for capital investment

Benefits of monopsony power (consumers)

- lower prices

- improved value for money, increase PPP

Drawbacks of monopsony power

- businesses may exploit suppliers. can reduce the profit of the suppliers and cause lower income for the workers in the supplier firm

- consumers might have less choice or higher prices in the long run as suppliers may leave the market

Characteristics of a contestable market

- Low barriers to entry + potential for large number of firms

- entry into and out of the market is costless

Examples of contestable markets in the UK

Vape shops

Hotels

Retail energy market

Conditions for market contestability

- a pool of new businesses willing and ready to enter the market

- low entry and exit cost

- equal access to technologies

- high rates of consumer switching

Most important condition of contestability

low sunk costs

- easier to enter a market when a new rival is already scaled

- high sunk costs makes it difficult to enter

The more contestable the market... the more... (profit)

The more contestable is the market, the higher the likelihood that price charged will be closer to normal profits only.

Exam technique CoR

How firms might be affected by increased contestability

in the absence of actual threat or competition, an unregulated firm could profit maximise at MR=MC. if the market becomes more contestable through liberalization, competitive pressures will keep prices down. instead of profit maximising, existing firms will have the incentive to cut prices to normal profit. this is where P=AC. There is also an incentive for businesses to control their unit costs and so avoids x-inefficiencies

Types of barriers of entry in a market

1. Hostile take over and acquisitions

2. Product differentiation

3. Capacity expansions

4. Predatory pricing