A monopsony exists when there is a dominant buyer in a market. In extreme cases there may be only one buyer in the market: this is called pure or absolute monopsony.
What is Monopsony Power?
- A monopsony has buying or bargaining power in their market.
- The monopsonist can use this bargaining power to negotiate lower prices from its suppliers, compared to a market in which there are many buyers competing with each other.
- The greater the share of total sales accounted for by a single buyer, the greater is its monopsony power of the buyer. For instance, a firm that buys 80% of a supplier’s output has more bargaining power than a firm that buys only 20% of a supplier’s output.
- Lower prices from suppliers reduces costs and therefore increases their profit margins
- Monopsony exists in both product and labour markets. This section is concerned only with product markets. (See notes on 3.5.3 for monopsony in labour markets).
Examples of Monopsony
- The NHS buys nearly all the prescription medicines from the pharmaceutical companies in the U.K.
- The online retailer ‘Amazon’ now controls much of the retail market in bookselling. It is able to buy books from the publishers at lower prices than ‘bricks and mortar’ booksellers.
- The major supermarket chains now sell most of the milk to consumers in the U.K. This gives them bargaining power over the dairy farmers who supply them with milk.
NB A firm’s monopsony power may be limited by the extent to which its suppliers have access to other markets. For instance, pharmaceutical companies can still sell to healthcare providers abroad; this limits the power of the NHS to drive down prices.
A bilateral monopoly exists when a dominant buyer (monopsonist) faces a dominant seller (monpolist) in the market. This situation exists in the case of the market for medicines in the U.K. The NHS is virtually the only buyer for many medicines, but a lot of medicines are patented, and therefore have only one supplier. The bargaining power may be fairly equal. It is certainly the case that the NHS is able to buy medicines much more cheaply than healthcare providers in other countries where there is a number of buyers (such as private, independent hospitals).
In some countries small producers (like dairy farmers or win producers) may group together in co-operatives, to negotiate collectively with big supermarkets. This enables them to get higher prices as they are in effect operating as a single (monopoly) supplier.
- To what extent does the U.K. government have bargaining power when negotiating contracts with aircraft manufacturers to supply planes for the Royal Air Force? How are U.K taxpayers affected by the extent of this bargaining power?
- Your answer should include: monopsony / share of market / share of sales / access to other markets / lower prices
Costs and Benefits of Monopsony
__Monopsonists __– Lower input prices and therefore higher profts
__Suppliers __– Lower prices for their goods, therefore lower profits. Lower prices will mean that less will be supplied, and some firms (generally the higher cost producers) may be driven out of the market completely.
Suppliers may be squeezed by monopsonists in other ways too. For instance, supermarkets often take a long time to pay small suppliers like local farmers. This means the supermarkets can earn more profit by keeping money owed to their suppliers in interest earning accounts. By contrast, the suppliers may be forced to borrow to pay their costs, such as wages to their workers.
__Employees __– Workers for supplying firms may lose their jobs or have lower wages as a result of lower prices/profits for their employer.
__Customers __– It is possible that consumers may benefit from lower prices if the monopsonist passes on some of the lower prices paid to suppliers to customers. For instance, supermarkets sell milk very cheaply as a way of encouraging shoppers to come to the store for other things as well. But the market quantity of the good in question may fall as monopsonists drive down price.