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3.4.6 Monopsony Power (Edexcel A-Level Economics Teaching PowerPoint)


Last updated 14 Sept 2023

This downloadable and editable PowerPoint covers monopsony power in markets.

Monopsony power is similar to monopoly power, but it applies to the buyer side of the market instead of the seller side. It's a situation where there's only one buyer for a particular product or service, giving them a lot of bargaining power. This can lead to lower prices for the buyer, but it can also hurt suppliers who have to accept lower prices for their goods. A classic example is a single large employer in a small town. The employer has monopsony power because they're the only employer in town, and they can use that power to keep wages low.

Examples of:

  • Agriculture: Large agribusinesses can often dominate a market and dictate prices to farmers.
  • Health care: Hospitals and health insurance companies can use their market power to pay lower prices to suppliers like doctors and medical device manufacturers.
  • Tech companies: Big tech companies like Amazon and Apple can use their size and market dominance to negotiate lower prices from suppliers.
  • Higher education: Colleges and universities can exert monopsony power over professors and other staff, since they're often the only major employers in their communities.

Supermarkets are another excellent example of a monopsony. They often have a lot of buying power and can negotiate low prices from suppliers. Supermarkets also tend to have a lot of market share in their areas, meaning that they can also dictate prices to consumers. This can hurt small farmers and suppliers who have to sell at low prices and hurt consumers who have fewer choices and might pay higher prices.

Another example of a business with monopsony power is the National Health Service.

The NHS is the single largest purchaser of healthcare services in the UK, and it uses that buying power to negotiate lower prices from suppliers like drug companies, medical device manufacturers, and healthcare providers.

Amazon is often cited as a textbook example of a monopsony. With its massive scale and market dominance, Amazon has enormous bargaining power with suppliers, allowing it to negotiate very low prices. This can hurt suppliers, especially small businesses, who may struggle to make a profit when selling through Amazon. On the other hand, consumers do benefit from the lower prices Amazon can offer. It's like the ultimate tug of war between consumer welfare and supplier well-being.

On the positive side, a monopsony can lead to lower prices for consumers, which is always a plus. But on the negative side, it can also stifle innovation and choice in the marketplace. When suppliers are forced to accept low prices from the monopsony, they may have less incentive to invest in developing new products or improving existing ones. And, consumers may have fewer options to choose from. So, in a way, the benefits of lower prices may come at the cost of less innovation and variety in the market. It's a tricky balance!

Monopsony power can contribute to economies of scale because it allows companies to buy larger quantities of goods and services at lower prices. This can result in cost savings and greater efficiency, which allows companies to pass those savings on to consumers through lower prices.

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