theme 3 : monopsony in product markets

in several industries there is …

one buyer and several sellers

examples of one buyer and many sellers

• supermarkets - monopsony power in buying food from farmers, if farmers don’t sell to the big supermarkets there are few alternatives

• amazon - biggest purchases of books, if publishers don’t sell to amazon at a discounted price they will miss out on selling to the biggest distributor of books

3 problems of monopsony power in markets

• can lead to lower prices for supplier - this reduces profit margins / abnormal profits further back in the supply chain

• firms with monopsony power often have a degree of monopoly selling power - this enables them to make high profits at the expense of consumers and suppliers

• rule with fear over many suppliers - the fear of having to reduce selling prices yet cope with inflation pressure on total costs

4 benefits of monopsony’s

• revenue : can mean a firm supplying them is able to increase production to satisfy the scale required by their big buyer

• suppliers can make investment decisions confidently, as their revenue source is stable - encourages them to improve their productive efficiency

• brand image : supplying a market leads adds value and gives potential customers confidence in your abilities to meet their requirements

• legal requirements : big suppliers are likely to offer stable and legal contracts, which would be upheld in court compared to “face to face” negotiated deals