Monopsony

Monopsony

1. Bilateral monopoly

   • Countervailing power in the market
   • Single buyer of labour, and a single seller of labour
     • Prices and quantity demanded and supplied will be higher than in a market a monoponist faces many sellers
   • One buyer and one seller in the market

2. Costs and benefits

   • The monopsonist
     • Gains higher profits by being able to buy at lower prices
       • Reduces its costs of production and is likely to lead to an increase in overall output because of a shift downwards in its marginal cost curve
   • Suppliers
     • Likely to loose out from a monospony
       • Prices paid for their goods or services will fall
         • Lower prices we lead to less being supplied
   • Cutomers
     • Impact depends on a variety of factors. Part of the lower costs for the monopsonist is likely to be passed on to customers in lower prices
       • There may be restrictions in supply, the extent to which supply to customers will fall depends upon the price elasticity of supply in the market in which the monopsonist is the buyer
   • Employees
     • Uncertain, for the monopsonist its purchase costs will be lower compared to a competitive market
     • However it wil purchase less of the good , it is then unclear as to whether more, fewer, or the same number of employees will be employed by the monopsonist

3. An overview

   • Very few pure monopsonists in the UK
     • Government dominates market for hiring teachers
     • Network Rail and the purchase of rail track maintence
   • Exists when there is only one buyer or seller in a market
   • It also has to posses the same characteristics as a monopolistic market (apart from the difference between buyers and sellers)
     • Sellers must not be able to sell their product to other firms outside the market
   • Assumed that they are profit maximisers

4. Equilibrium price and output under monopsony

   • Monopsonists will pay lower prices to their suppliers than if the market were competitive
     • Suppliers will also supply less to the market
   • Equilibrium price and quantity will be lower than if the market were perfectly competitive
   • Both price paid by and the amount supplied to the monopsonist will fall compared to a perfectly competitive market
   • The exact amount that a profit maximising monopsonist will buy is determined by the marginal cost=marginal revenue rule
     • If supply curve is upwards sloping, it means that the monopsonist has to pay a higher average price if it wants to buy more from the market
     • But the marginal cost of buying more is higher than its average price

5. Monopsony power

   • A pure monopsony exists when there is only one buyer in the market, which is very rare in practice
   • There are many more examples of firsms that have monosony power
     • This means that they are a large enough buyer in the market to be able to charge the price at which they buy from suppliers
   • The more a firm buys a percentage of tatal sales in the market, the more the monopsony power
   • When a firm hass weak monopsony power over the market, suppliers are to some extent likely to be able to resits the demans of the monopsonist