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In the News

Monopsony Power - Tesco to charge suppliers for fulfilling online orders

Graham Watson

11th March 2023

Evidence of rising costs? Or exploitation of a monopsony position? A great example to ignite classroom discussion!

I'm with Ged Futter on this - it's "outrageous". The marginal cost of an online sale is zero, although I'm sure that supermarket will say that it costs them to pick, pack and ship the goods. If so, the consumer should be paying extra. I hope for two things: that the supplier vote with their feet - en masse - and that the Grocery Code Adjudicator takes a dim view of the practice.

Please read: Tesco to charge suppliers extra to sell online (BBC news)

Background on monopsony power

Monopsony power refers to a situation where a single buyer has significant market power, often leading to lower prices for goods and services, but also potentially resulting in lower wages or reduced choice for suppliers.

In the context of a supermarket such as Tesco, monopsony power means that the company has a dominant position as a buyer of goods from suppliers, particularly smaller suppliers. Because Tesco is such a large buyer, it can demand lower prices from its suppliers and potentially negotiate more favorable terms of trade than its suppliers can achieve elsewhere.

For example, imagine that Tesco is the main buyer of apples from local farmers. Because Tesco is the only significant buyer of apples in the area, it has a monopsony over the local apple market. This means that the farmers must accept Tesco's terms of trade if they want to sell their apples. Tesco may use its bargaining power to negotiate lower prices for apples or demand that the farmers meet strict quality standards to sell their produce to Tesco.

This can have negative effects on the farmers and their communities, as they may struggle to make a living due to the lower prices they receive from Tesco. On the other hand, Tesco may benefit from lower costs and potentially pass these savings on to consumers, resulting in lower prices for apples in Tesco stores.

Overall, while monopsony power can lead to lower prices for consumers, it can also have negative consequences for suppliers, particularly smaller ones. It is important for regulators to monitor and address any potential abuses of market power by large buyers like Tesco to ensure a fair and competitive marketplace.

Regenerate respon

Graham Watson

Graham Watson has taught Economics for over twenty years. He contributes to tutor2u, reads voraciously and is interested in all aspects of Teaching and Learning.

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