What is monopsony power?
- A monopsony has buying or bargaining power in their market.
- This buying power means that a monopsony can exploit their bargaining power with a supplier to negotiate lower prices.
- The reduced cost of purchasing inputs increases their profit margins
- Monopsony exists in both product and labour markets – in this chapter we focus on buying power in the markets for goods and services
Evaluating the economic welfare effects of monopsony power in markets
In evaluation it is important to remember some of the possible advantages from monopsony power:
In evaluation it is important to remember some of the possible advantages from monopsony power:
- Improved value for money – for example the UK national health service can use its bargaining power to drive down the prices of routine drugs used in NHS treatments and ultimately this means that cost savings allow for more treatments within the NHS budget.
- Producer surplus has a value as well as consumer surplus – lower input costs will raise profitability that might be used to fund capital investment and research.
- A monopsony can act as a useful counter-weight to the selling power of a monopolist e.g. the NHS versus the global pharmaceutical companies.
- In most supply chain relationships – for example between supermarkets and their suppliers – the long term sustainability of an industry requires that both benefit – if there are no mutually beneficial gains from trade, ultimately trade and exchange will break down.
- The growth of the Fair Trade label and organisation is evidence of how pressure from consumers can lead to improved contracts and prices for farmers in developing countries. For example if tea producers in Rwanda get a stronger price for their output, the increased income and profit will have important economic and social benefits for the exporting industry and the wider economy.
Key evaluation point - it is often difficult to assess the strength of monopsony powerRyanAir to buy 175 new aircraft
Low-fare airline RyanAir is to buy nearly £10 billion-worth of new planes in a move that will create more than 3,000 jobs. The no-frills Irish carrier is purchasing 175 of Boeing's new 737-800 aircraft, which will be delivered over the period up to 2019. The new planes will allow RyanAir to grow its fleet to more than 400 aircraft, serving more than 100 million passengers a year across Europe by 2019.Source: News reports, June 2013
Source: Tutor2u
Monopsony in the Real World
There are several employers who might employ supermarket checkout workers. However, in practise, it is difficult for workers to switch jobs to take advantage of higher wages. There is a lack of information and barriers to moving jobs. Therefore, although there are several buyers of labour, in practise they have a degree of monopsony power.Problems of Monopsony in Labour Markets
- Monopsony can lead to lower wages for workers. This increases inequality in society.
- Workers are paid less than their marginal revenue product.
- Firms with monopsony power often have a degree of monopoly selling power. This enables them to make high profits at the expense of consumers and workers.
- Firms with monopsony power may also care less about working conditions because workers don’t have many alternatives to the main firm.
Monopsony in Product Markets
In several industries there is one buyer and several sellers.- Supermarkets have monopsony power in buying food from farmers. If farmers don’t sell to the big supermarkets, there are few alternatives.
- Amazon.com is one of the biggest purchases of books. If publishers don’t sell to Amazon at a discounted price, they will miss out on selling to the biggest distributor of books.
