Monopsony 3.4.6

What is a monopsony?

A monopsony has buying or bargaining power in one or more markets. This means that a monopsony can exploit bargaining power with a supplier to negotiate lower prices

Examples of monopsony?

→ Super-markets having power over farmers

→ 90% of blackcurrants are bought by Ribena (UK)

→ NHS

*Monopsony power can happen in both product markets and the labour market

Is it likely that a monopsony is a monopoly and vice versa?

It is likely the case that a monopsony is a monopoly, but a monopoly isn’t necessarily a monopsony

Characteristics and conditions? (5)

• Single buyer

• Limited substitute buyers

• Price maker

• Downward-sloping supply curve

• Barriers to entry

Benefits to firms of monopsony?

→ Allows firms to achieve purchasing EoS leading to lower AC

→ Lower purchase costs bring about higher SNP and (ultimately) increased return for shareholders

→ Extra profit (producer surplus) might be used to fund investment/research to improve dynamic efficiency

Costs to firms of monopsony?

→ If monopsony exploits its market power excessively, it can harm suppliers → could lead to reduced supply, lower quality, or exit of smaller suppliers from market

Benefits to consumers of monopsony?

→ Lower prices e.g. super-markets can negotiate better prices from manufacturer that are then perhaps passed to consumers → increases real incomes + consumer surplus

→ Improved value for money e.g. NHS can use bargaining power to cut the prices of drugs used in treatments. Costs savings made then allow for more people to be treated

Costs to consumers of monopsony?

→ If monopsony drives suppliers out of business or reduces the quality of inputs, this could result in limited variety + higher prices of product in long-run

→ Less choice, decrease in quality

Benefits to employees of monopsony?

→ If monopsony offers competitive wages + working conditions due to its ability to negotiate lower input costs

Costs to employees of monopsony?

→ In cases where a monopsony uses its power to depress wages, it can lead to lower incomes and reduced job opportunities for workers

Why?

A monopsony depresses wages because it has labour market power + faces an upward-sloping labour supply curve, allowing it to set wages below workers’ marginal revenue product, leading to lower wages + employment compared to a competitive market

Benefits to suppliers of monopsony?

→ Stability + reliability of a monopsony as a consistent buyer

Costs to suppliers of monopsony?

→ May face pressure to accept lower prices, reduced profit margins, less bargaining power

→ Reduced income + profits

How might a monopsony damage consumer welfare?

→ Businesses may use their buying power to squeeze lower prices out of suppliers. This reduced profits of firms in the industry supply chain and may cause lower incomes for those employed

→ A recent example was the battle of milk farmers to get a price from supermarkets that covers the average cost of milk

→ Milk producers claim supermarkets aren’t paying a ‘fair price’ leading to losses/subnormal profit

→ Consumers might be faced with less choice and/or higher prices in long-run if farmers and other growers leave industry. There is also risk of supply-chain disruptions as seen in COVID

What policies might be used to control monopsony power?

• What regulators are there in the UK?

→ Creating new regulators such as The Groceries Code Adjudicator - GCA

→ Comp policy might block some mergers/takeovers - CMA has power to stop

→ Tougher laws/industry standards on ethical sourcing of suppliers

→ Using tech for suppliers to sell directly to consumers

→ Establishing producer co-operatives (i.e. acting as a single large seller, reducing ability of buyer to dictate prices)

Example of a producer co-operative?

ARLA - milk producer co-operative

Pros of producer co-operatives?

→ Better able to negotiate prices with transnational corporations

→ Might use extra profit to invest in branding etc