Monopsony

Monopsony

1. A market where there is only one buying firm that buys majority of output from many small selling firms - complete control over the market.

   • Buyer - Large firm, monopoly/oligopoly. Profit maximise by setting low prices since they are price setters and have no threat of losing sellers since they buy more than 90% output.
   • Sellers: Small firms - Competitive firms selling homogenous goods, they have many rivals and are price takers. Perfectly Elastic AR curve since rely on buyers for income.

2. Price Determination: ACBuyer = ARSeller

   • AC buyer: Profit maximisation, cost minimisation, low costs paid to sellers
   • AR Seller: Rely on buyer, have no choice, low consumer welfare
     • Sellers may lave market if no profits are made
     • Gov.t supports sellers via subsidisation, minimum pricing and regulating buyers

3. Benefits

   • Increases Prod Efficiency(MES)
     • Low Cost = Low Prices for consumers
       • Necessity goods must be kept at low prices e.g. medicine

4. Drawbacks

   • Increases income inequality
     • Important small industries may close down
       • Small firms victims of Oligopoly Price Wars

5. Extent- Monopsony power can be limited by government intervention, trade unions and product differentiation. The government implements a minimum price scheme that ensures that the welfare of the sellers is protected. Trade unions are representatives of all the workers in an industry and take part in collective bargaining and price negotiations. Product differentiation offers monopolistic characteristics to the firms and they gain some influence on the price.