Monopsony Power - Supermarket Bullies?
Many thanks to Janis Thompson at Bristol GS for suggesting this terrific 3-minute video on the battle between supermarkets and their hard-pressed suppliers. A great range of business and economics topics in here, including an obvious starting point for discussing the ethical issues raised in the clip
Download student worksheet (including video link)
Swine flu vaccines and elasticity of supply
The scale of the ordering of swine flu vaccinations by governments across the world is eye-wateringly large! GlaxoSmithKline plc - one of the world’s biggest pharma companies has reported that governments around the world have so far ordered 440 million doses of its pandemic swine-flu vaccine Pandemrix. GlaxoSmithKline has been engaged in a tense race to get new swine flu vaccines onto the market fighting the likes of Sanofi-Aventis, Novartis AG and AstraZeneca to win contracts for public health programmes. For students of the price mechanism it is a fascinating example of many supply and demand concepts at work:
The challenge of scaling up production to meet huge levels of demand - this has involved out-sourcing
The relative importance of fixed and variable costs in developing and manufacturing/distributing a new drug
The elasticity of supply of vaccines to meet short term health requirements
The oligopolistic race to win and protect market share
Economies of scale in production
The balance of power between the major buyers and the multinational drug suppliers
Price discrimination tactics
The Guardian reports that:
“The company makes the vaccine in Dresden and Quebec but the demand is so great – about 60% higher than for usual seasonal vaccines – that it is also outsourcing production to third-party manufacturers.”
According to the Wall Street Journal
“Glaxo hasn’t released information on cost per dose of the vaccine. However, Chief Executive Andrew Witty said in July that Glaxo was charging wealthy nations $10.26 per H1N1 vaccine shot and developing countries less. The drug maker is also donating 50 million doses to the World Health Organization.”
The Independent reports that
“The United States has begun a massive campaign aiming to vaccinate 250 million people against the illness by year’s end.”
And the Times reports that “total booked orders for the drug are worth about £2.2 billion — a significant sales and profit windfall as a result of the swine flu epidemic”
Apprentice Jockeys and Low Wages
The tragic death of two apprentice jockeys in an incident in North Yorkshire last weekend has prompted much press coverage of the ambitions and daily lives of the young people who aspire to make it into the intensely competitive world of professional horse racing. It struck me, reading this article in the Times, that the apprentice jockey is an excellent example to use of how a highly elastic supply of young people who want to reach their dreams has an effect on pay and conditions in their own particular labour market.
There are large hurdles (or barriers to entry) for people wanting to be a fully-fledged professional jockey. Last year less than 6% of apprentices made it into the professional ranks. For the humble apprentice desperately looking for rides and that all-important chance, the basic salary is likely to be little more than £10,000 a year for a job that involved huge hours many of which are at unsocial times plus the hard graft of traveling around the country from one course to another.
The Times article talks about “an endless supply of young talent” seeking one of the very few (and highly coveted) apprenticeship schemes. In other words, the supply of labour into the market is highly elastic at a relatively low wage rate. Little wonder that Trainers can employ apprentice jockeys at a low wage rate - and also take a slice of their riding fees.
According to the Times article:
*Until their success dictates otherwise, apprentices earn the basic stable lad’s wage. This starts at about £158.87 for a 45-hour week, rising to £214.94 between the ages of 16 to 21
*Generally, a trainer will take half the riding fees generated by his apprentice while paying half of his expenses. The riding fee on the Flat is £103.45
The passion of young jockeys also invites a discussion with students of the non-pecuniary aspects of work - the paradox being that many of the hardest jobs, both in physical effort and risk - are those that are deeply attractive to plenty of young people and thus carry virtually nothing in the way of compensating financial incentives.
Fiscal policy, public sector pay and employment flexibility
Steve Bundred, Chief Executive of the government Audit Commission, has suggested that public sector workers would willingly accept a pay freeze this year, because they have done well in recent years and will recognise that a pay freeze is better than the alternative. Reports of his comments will focus particularly on education and the NHS, as two monopsony employers who provide the services used by most taxpayers (the NHS remains the world’s third largest employer, suggesting huge scope to make savings by reducing the pay bill). Those services were being given as the focus of the debate in parliament this week over public spending and investment between Gordon Brown and David Cameron. The Prime Minister’s enjoyable statement in Prime Minister’s Questions on Wednesday that there would be a ‘zero percent increase’ in public spending in 2013-4 was reflecting his determination that the way to pull the country out of recession is through continued spending on government investment and public services. Mr Bundred however is suggesting that there have to be cuts amounting to £50bn in order to begin the task of reducing national debt – that would be a cut of approximately 8% of the Treasury’s projection of £671bn managed expenditure for 2009-10.
read more...»Revision - Monopsony Power in Markets
A monopsonist has buying power in their market. This buying power means that a monopsonist can exploit their bargaining power with a supplier to negotiate lower prices. The reduced costs of purchasing inputs increases their potential profit margins. Monopsony exists in both product and labour markets.
read more...»Labour Market Failure - Exploitation of Migrant Workers
Martin Shankleman of the BBC reports on what looks a like a blatant example of exploitation of vulnerable migrant workers who seek employment in the (often unlicensed) UK food processing industry. Gangmasters have monopsonistic power in their own labour markets and, as this report shows, Saphire Trading based in Southampton appears to have shown a disgusting lack of care for many of the people they have taken on. A severe case of labour market failure and one that requires effective regulation - in this case the Gangmasters Licensing Authority.
Revision - Labour Market Failure (presentation)
Here is a revised streamed presentation on market failure in the labour market
read more...»Rio Tinto and Nippon Steel agree big cut in iron ore prices
Annual contract prices thrashed out between the world’s biggest iron ore producers and the giant steel companies who are the biggest users of the commodity provide a window on a bi-lateral monopoly situation which pitches a monopoly supplier with a monopsonistic buyer. The balance of negotiating power in the market sends the contracted price higher or lower demanding on changing supply and demand conditions.
So the news that Rio Tinto’s subsidiary Hammersley Iron has agreed a 33 per cent cut in the annual contract price for iron ore with Japan’s Nippon Steel and with it brought an end to over five years of sustained increases in world iron ore prices is significant.
read more...»Passing the burden - Sainsbury’s and their suppliers
AS micro students grappling with their revision on government intervention will come across the issue of who ends up paying for an indirect tax. The conventional view is that a supplier faced with an excise duty or other tax can consider passing it on by raising the final price to the consumer. Price elasticity of demand and supply come into play in deciding who eventually bears the burden of an indirect tax.
Here is a slight twist. Sainsbury’s has written an email to their suppliers of alcholic refreshment more or less insisting that they aborb the recent hike in duty announced in Darling’s budget. According to a report in the Daily Telegraph:
“Duty – April 2009” sent to its beer and cider suppliers prior to the Budget, J Sainsbury said that it would be “replacing” any lines on June 1 “that we cannot maintain margin on” following the announcement of an increase.”
In effect - they are telling them to aborb the tax or risk being delisted by the supermarket. Given Sainsbury’s monopsony power it is clear where the balance of influence lies in the relationship. Is Sainsbury’s decision asymmetric? Did they pass on the 2,5% decrease in VAT to their drinks department customers last Autumn?
Beet farmers look for better price to sweeten the pill
Here is a story that highlights the monospony power of a business when set against the determination of farmers to get a better price for their product. For some time sugar beet producers in the UK have been battling with British Sugar to reach an agreement for the contracted price for their beet harvest in 2009.
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