Monopsony

when does a monopsony exist?

when there is only ONE buyer in the market

what are monopsonist characteristics?

• sole buyer in the market

  • sellers cannot sell their products to other firms outside the market - only to the monopsonist

they are profit maximisers, who aim to minimise their costs by paying their suppliers the lowest price possible

examples of monopsonies

• TESCO

  • has bad reputation with farmers that supply them as they sign contracts saying that they are the only buyers

• Walmart

  • does the same as TESCO

government monopsony

• the government runs a monopsony through the NHS and schooling

  •  over 90% of teachers are employed by the state

benefits of monopsony power to firms:

lower costs → cost minimisation supports firms in asking ore profits

costs of monopsony power to firms:

relationships with supplier may worsen, monopsonist may drive their supplier out of business

benefits of monopsony power to consumers:

lower prices → the monopsonist pays the minimum price

costs of monopsony power to consumers:

supplier may have to cut corners or lower quality to owner costs to remain profitable

benefits of monopsony power to employees:

in minimising costs of raw materials it leaves more funds to pay its staff

costs of monopsony power to employees:

may question the ethics of the way firm is acting

benefits of monopsony power to suppliers:

when the supplier has market power as a monopolist it can counteract the monopsonist

costs of monopsony power to suppliers:

buyer minimises costs → reduced price paid to supplier

monopsonist may exploit its market power by paying less or later

suppliers may be driven out of the market due to lower profitability

analysis of monopsony

• monopsonist has buying power in their market

• this buying power means that a monopsonist can exploit their bargaining power with a supplier to negotiate lower price’s

  • note they are still subject to market forces – just like a monopolist could only increase price by restricting quantity sold, a monopsonist can only reduce supplier prices by restricting quantity bought.

• the reduced costs of purchasing inputs increases their potential profit margins

evaluation of monopsony

• improved value for money

  • e.g. NHS can drive down prices of routine drugs → more treatments can be offered within NHS budget

• higher profits could be used for R&D

• monopsonists can act as a counter weight to a monopolist (bilateral monopoly)

• monopsonists cannot drive prices down excessively – the long term sustainability of an industry requires both parties to benefit

application

• Tesco and Unilever price dispute

  • background: in 2016, Tesco, the UK’s largest supermarket chain, engaged in a pricing dispute with Unilever, a major supplier of household brands like Marmite, PG Tips, and Ben & Jerry’s.

  • cause of dispute: Unilever sought to increase prices of its products in the UK to offset the sharp drop in the pound’s value following the Brexit vote. Tesco resisted these price hikes to maintain competitive pricing for consumers.

  • monopsony dynamics: Tesco’s dominant position in the UK grocery market allowed it to challenge Unilever’s proposed price increases. By removing Unilever products from its online platform, Tesco leveraged its buying power to pressure Unilever into negotiations, showcasing monopsony behavior.

• Premier Foods’ ‘Pay and Stay’ practice:

  • background: in 2014, Premier Foods, owner of brands like Mr Kipling and Bisto, was reported to have asked its suppliers for payments to continue doing business with the company, a practice termed ‘pay and stay’.

  • supplier concerns: Suppliers described this practice as akin to “blackmail,” feeling compelled to make payments to avoid being delisted, which could jeopardise their business.

  • monopsony dynamics: Premier Foods’ significant market position enabled it to impose such financial demands on suppliers, reflecting monopsony power where the buyer exerts considerable influence over terms of trade.