Monopsony

This section explains Monopsony and the Characteristics and Conditions for a Monopsony to Operate.

A monopsony is a market structure where there is a single dominant buyer of a good, service, or factor of production. While often analysed in the labour market, monopsony power can also apply to buyers of raw materials or goods.

Characteristics and Conditions for a Monopsony to Operate

• Single or dominant buyer: One firm has significant buying power in the market.
• Market power over suppliers: The buyer can influence prices and terms of purchase.
• Downward-sloping supply curve: To buy more, the firm must pay a higher wage or price, but it also recognises it raises costs on all units.
• Marginal cost of employing an additional unit (e.g., a worker) exceeds the average cost.
• Profit maximisation occurs where marginal cost of employment = marginal revenue product (MC = MRP), rather than where supply equals demand.

Examples:

• A major supermarket chain negotiating with farmers.
• The NHS as the main employer of doctors in the UK.
• A large firm in a remote area hiring most local workers.

Costs and Benefits of a Monopsony to Stakeholders

To Firms (Monopsonists):

Benefits:

• Can reduce input costs, increasing profit margins.
• May have more control over supply chains and quality.

Costs:

• Risk of damaging long-term supplier relationships.
• Could face reputation damage or regulatory scrutiny if seen to exploit power.

To Consumers:

Benefits:

• Lower input costs may lead to lower prices for final goods/services.
• Efficiency gains may improve product accessibility and availability.

Costs:

• If monopsony power leads to reduced investment or innovation from squeezed suppliers, product quality may fall.

To Employees (in Labour Market Monopsony):

Benefits:

• If the monopsonist is a stable, large employer, it may offer job security or consistent employment.

Costs:

• May face lower wages than in a competitive labour market.
• Reduced employment compared to the socially optimal level.
• Limited alternatives may weaken bargaining power.

To Suppliers:

Benefits:

• Guaranteed, large-scale orders from a major buyer.
• May help smaller suppliers enter markets via major contracts.

Costs:

• May be forced to accept lower prices, squeezing profits.
• Reduced ability to invest or innovate due to limited revenue.
• May become overly dependent on a single buyer.

Summary

A monopsony can deliver efficiency and cost savings for firms and potentially consumers, but often at the expense of workers and suppliers. The overall impact depends on the degree of monopsony power and whether regulation or ethical practices are in place to prevent abuse.