3.4.6 Monopsony

monopsony

occurs when there is a single buyer in the market

they have buying or bargaining power

monopsonies in real life

pure monopsonies rarely exist but many firms experience monopsony power

examples of monopsnies

• E.g. Supermarkets in the UK buy the majority of milk supplied by dairy farmers and collectively act as a monopsony

• E.g. The Ministry of Defence is often a dominant purchaser of war materials supplied by UK companies

• E.g. The National Health Service is the dominant purchaser of nursing labour

example of consequences of monopsony

• tesco demands supplier price cuts in discount battle

• haribo stocks run low at tesco over price cut row

• ore than 1,000 dairy farms in the UK have closed since 2013 as supermarkets have exercised their monopsony power reducing the price, they pay farmers per litre of milk

• It is becoming increasingly difficult to recruit teachers and nurses as the Government continues to suppress wages. This is changing the education and healthcare industries

characteristics of monopsonist

1. They are wage makers: this is especially prevalent in industries where the government is the majority purchaser of labour e.g. doctors, nurses, teachers, emergency services staff, military personnel 

2. They are profit maximisers: They aim to minimise their costs and maximise their profits by paying suppliers as little as possible

3. They purchase a large portion of the market supply provided by sellers

monopsony diagram

• mc=ac decrease

• pm output increase

• pm price decrease

• supernormal profit increase

benefits to firms of monopsony

• Reduced costs of production lead to higher profits

• more investment

costs to firms of monopsony

• May experience some reputational damage for the way they treat their suppliers

• The continual price pressure on suppliers often results in conflict, which can be difficult to manage

• In the long-run, they may drive their suppliers out of business, causing supply chain issues

benefits of monopsony to employees

• The higher profits often result in higher wages for the monopsonist's employees

costs of monopsony power to employees

• Employees may find it difficult to reconcile their ethics/values with the way suppliers are treated

• working fot the supplier being pused for lower prices can cause lower incomes for those employed

benefits of monopsony power to consumers

• Lower average costs for the firm may result in lower prices for consumers and a higher consumer surplus

costs of monopsony power to consumers

• The quality of the product may decrease as suppliers attempt to cut their own costs in response to the price pressure from the monopsonist

benefits of monopsony power to suppliers

• Supplying to a large well-known monopoly may enhance the supplier's reputation and open up new opportunities

• Supplying to a large, well-known monopoly may provide an opportunity to increase sales volume

costs of monopsony power to suppliers

• Suppliers may seek to reallocate their resources to more profitable industries leading to less supply in the market (law of supply)

• Suppliers may be driven out of business