Monopsony Power and Consumer Welfare (Chain of Analysis)

This revision video looks at building a chain of analytical reasoning on this question "Analyse how monopsony power may affect consumer welfare" and raises a couple of possible evaluation point

Chain of analysis

A monopsony has buying or bargaining power. For example, retailers have power when purchasing supplies from farmers.

This means that a monopsony (in theory) can use their purchasing power to negotiate lower prices for raw materials & other inputs

As a result, their variable costs of production will be lower and this will lead to a decrease in marginal and average total costs.

If the monopsony is a profit-maximising firm, then a fall in AC and MC (ceteris paribus) will lead to lower equilibrium price.

In this way, final consumers may benefit from lower prices which will therefore increase their consumer surplus and economic welfare.

This assumes that the price paid by the consumer is the main determinant of their welfare. This may not be the case in reality.

Evaluation points

Some suppliers make leave the market if monopsony power leads to losses being made (where price < average cost). This would reduce the amount of consumer choice in the long run

Lower supply prices might cut the profits available for investment and innovation. The consequence of this might be a reduction product quality and a shift towards mass production might have environmental issues and/or raise ethical concerns for example about animal welfare.