3.4.6 Monopsony

DEFINE MONOPSONY

• single buyer in a market

DEFINE MONOPSONY POWER

• where a firm can negotiate lower prices from a supplier because there are only a few dominant buyers in a market

MONOPSONY- CHARACTERISTICS

• profit maximisers- pay suppliers lowest price to minimise costs and make the most of their position as only buyer

• firms with monopsony power can negotiate lower prices

• firms with monopsony power have price setting power

COST AND BENEFITS OF MONOPSONY TO…

• firms

• consumers

• employees

• suppliers

BENEFIT OF MONOPSONY ON FIRMS

• higher profits- can buy materials at low prices → lower AC → higher SNP → increase investment, R&D and returns for shareholders

• benefit from purchasing EoS

COST OF MONOPSONY ON FIRMS

• lower quality and reliability- supplier forced to cut costs → goods worse quality or unreliable deliveries

• reduced choice of suppliers- low prices may put suppliers out of business → less choice of supplier

BENEFIT OF MONOPSONY ON CONSUMERS

• lower prices- low costs from firms passed onto consumers → higher purchasing power → increased consumer surplus

• benefits of re-investments- could improve quality of good

COST OF MONOPSONY ON CONSUMERS

• less choice- suppliers may be forced to close due to low profits → business may buy fewer inputs → less supply → decrease consumer welfare

• fall in quality- due to suppliers having to cut costs to remain in business

BENEFIT OF MONOPSONY ON EMPLOYEES

• improved job security- monopsonist earning higher SNP → lower risk of being made redundant

• higher wages- high SNP → more likely for monopsonist to increase wages

COST OF MONOPSONY ON EMPLOYEES

• less job security for workers in firm that supply monopsonist- due to low profits/losses

• lower wages for workers in firm that supply monopsonist- due to low profits/losses

• both decrease living standards

BENEFIT OF MONOPSONY ON SUPPLIERS

• high sales- due to lower prices, monopsonist might buy more to meet demand (as they likely will be selling their good at a low price)

COST OF MONOPSONY ON SUPPLIERS

• exploitation- low negotiating power due to lack of buyers → low prices → low profits → can cause businesses to shut down