define monopsony
When a single buyer controls the market for a particular good or service
what are the characteristics of a monopsony?
- single dominant buyer, with substantial power and controls the majority of a market for a particular good or service
- monoposnist become price makers it can do so because sellers have limited alternatives, and the monopsonist’s demand significantly affects market prices
- ** high barriers to enter** for new buyers eg: regulatory restrictions, high startup costs, or economies of scale that favor larger buyers.
what are the benefits of becoming a monosony to firms?
- can achieve purchasing economies of scale, reducing LRAC, more productivley efficent
- increase profit margins and higher returns for shareholders
- potentially profit could be retained and invested into researchand development, increasing dynamic efficency
what are the benefits to consumers of a monopsony?
- lower costs may be passed onto consumers leading to lower prices, increasing consumer surplus and increasing real income for consumers
Analyse how monopsony power may affect consumer welfare
- A monopsony has buying or bargaining power. For example, retailers have power when purchasing supplies from farmers.
- This means that a monopsony (in theory) can use their purchasing power to negotiate lower prices for raw materials & other inputs
- As a result, their variable costs of production will be lower and this will lead to a decrease in marginal and average total costs.
- If the monopsony is a profit-maximising firm, then a fall in AC and MC (ceteris paribus) will lead to lower equilibrium price.
- In this way, final consumers may benefit from lower prices which will therefore increase their consumer surplus and economic welfare.
- This assumes that the price paid by the consumer is the main determinant of their welfare. This may not be the case in reality.
Evaluation points
Some suppliers make leave the market if monopsony power leads to losses being made (where price < average cost). This would reduce the amount of consumer choice in the long run
Lower supply prices might cut the profits available for investment and innovation. The consequence of this might be a reduction product quality and a shift towards mass production might have environmental issues and/or raise ethical concerns for example about animal welfare.
what are the costs of monopsonys to employees and suppliers?
- suppliers squeezed to minimal profits
- employees may have to bear the weight of cost cutting through lower wages
