Monopsony (Edexcel A Level Economics A)

Monopsony Power

• A monopsony occurs when there is a single buyer in the market

• A pure monopsony is actually 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

• A monopsonist has three main characteristics

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

Costs & Benefits of a Monopsony

• Consumers frequently cheer 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
    

The Costs and Benefits of Monopsony Power