Monopsony power 3.4.6

What is a monopsony?

A monopsony has buying or bargaining power in one or more markets

What can a monopsony do to bargaining power?

A monopsony can exploit bargaining power with a supplier to negotiate lower prices.

What markets does monopsony power happen in?

Can happen in both products market (markets for goods and services) and the labour market.

What are some examples of monopsonies?

• Supermarkets

• National Health Service

• Energy generators

• British sugar

• Amazon Inc

• Food manufacturers

What are the benefits to firms from having monopsony power?

• Allows firms to achieve purchasing economies of scale leading to lower long run average costs

• Lower purchase costs bring about higher supernormal profits and increased returns for shareholders

• Extra profit (producer surplus) might then be used to fund investment or research & development to improve dynamic efficiency.

What are potential benefits of monopsony for consumers?

• Consumers gain from lower prices- for example, supermarkets can negotiate better prices form manufacturers that are then perhaps passed to consumers- this increases their real income and consumer surplus.

• Improved value for money- for example, the NHS can use bargaining powers to cut the prices of drugs used in treatments. Cost savings made then allow for more people to be treated within a given (scarce) NHS budget.

How could monopsony damage consumer welfare?

• Businesses may use their buying power to squeeze lower prices out of suppliers- reduces profits of supply chain, lower income for employees.

• Consumers might be faced with less choice and/or higher prices in the long run if farmers and other growers leave the industry.