Theme 3 Topic 4.6

Question 1

What is a monopsony

Answer 1

when there is a single buyer in the market

Question 2

what is a pure monopsony

Answer 2

very rare, however there are many cases where there is a dominant buyer in an oligopoly or monopoly market structure

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

Question 3

3 main characteristics

Answer 3

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

Question 4

Lower prices

Answer 4

Consumers frequently appreciate lower prices as it enables their income to go further.
However, lower prices that are generated through monopsony power have the potential to change an entire industry in the long-run

E.g. More 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

Question 5

Benefit to firm

Answer 5

Reduced costs of production lead to higher profits

Question 6

Costs to firm

Answer 6

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

Question 7

Benefit to employees

Answer 7

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

Question 8

Costs to employees

Answer 8

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

Question 9

Benefit to consumers

Answer 9

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

Question 10

Costs to consumers

Answer 10

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

Question 11

Benefit to suppliers

Answer 11

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

Question 12

Costs to suppliers

Answer 12

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

Question 13

Context

Answer 13

British Sugar exploits sugar beet farmers