monopsony

• monopsony


  exists where there is one buyer in the market

  if a firm has monopsony power it means that it has buying or bargaining power in their market

  can exploit their bargaining power with a supplier to negotiate lower prices than if the market was competitive, but suppliers will also supply less to the market - in theory, lower cost of purchasing inputs increases monopsonists profit margins

  can exist in both product and labour markets
• monopsony power in product market


  where final consumer faces a monopoly or oligopoly - little competition between competing firms for the product of their suppliers

  exploiting monopsony power, firms able to lower the av. costs -> may create a barrier to entry for future competition in final retail market + strengthen both the monopoly/oligopoly in market + monopsony can see this to some extent with suppliers
• monopsony examples

  • electricity generators can negotiate lower prices for coal + gas supply contracts
  • car-rental firm seeking a contract to a manufacturer to supply new cars
  • low-cost airline getting favourable price when purchasing new fleet of aircraft
  • gov. major buyer e.g. in military procurement
  • NHS dominant buyer of prescription drugs from pharmaceutical companies
• monopsony recent examples

  • April 2019: Sainsbuys + Asda merger prevented by CMA - hoped to sabe £1bn costs from suppliers
  • Feb 2916: Asda ask suppliers for discounters to help compare against rivals like Aldi
  • Dec 2015: UK paying less for new cancer drugs than a no. of other high-income countries according to a report in The Lancet Oncology
  • Nov 2015: Carlsberg told suppliers to extend payment deadline to 93 days in breach of European guidelines
• benefits of monopsony power to firms

  • allows larger firms to achieve producing e.o.s -> lower LRAS
  • lower purchasing costs -> increased profits and returns for shareholders
  • extra profit used to find capital investment or R&D
  • NHS purchasing at lower costs have social benefits
• benefits of monopsony power to consumers

  • lower prices e.g. supermarkets negotiate better prices with suppliers passed to consumers
  • improved value for money - e.g. NHS use bargaining power to drive down P of routine drugs used in NHS treatments, cost savings allow for more treatments withing NHS budget
  • monopsonist is counter-weight to market power of a monopolist, protecting interests of consumers
• disadvantages of monopsony power

  • business may use buying power to squeeze low prices out of suppliers -> less profit of firms in supply chain and causes lower income
  • Paul Krugman heavily critical of monopsony power of Amazon in book industry
  • as employers, firms can force wages below market rate