3.4.6 Monopsony

• A monopsony occurs when there is a single buyer in the market
• A pure monopsony is actually very rare, however there are many cases where there is a dominant buyer in an oligopoly or monopoly market structure 
  • E.g. Supermarkets in the UK buy the majority of milk supplied by dairy farmers & collectively act as a monopsony
  • E.g. The Ministry of Defence is often a dominant purchaser of war materials supplied by UK companies
  • E.g. The National Health Service is the dominant purchaser of nursing labour
    
    
    
• A monopsonist has three main characteristics

1. They are wage makers: this is especially prevalent in industries where the government is the majority purchaser of labour e.g. doctors, nurses, teachers, emergency services staff, military personnel 
2. They are profit maximisers: They aim to minimise their costs & maximise their profits by paying suppliers as little as possible
3. They purchase a large portion of the market supply provided by sellers
   
   
   

• Consumers frequently cheer lower prices as it enables their income to go further. However, lower prices that are generated through monopsony power have the potential to change an entire industry in the long-run
  • E.g. More than 1,000 dairy farms in the UK have closed since 2013 as supermarkets have exercised their monopsony power reducing the price, they pay farmers per litre of milk
  • It is becoming increasingly difficult to recruit teachers & nurses as the Government continues to suppress wages. This is changing the education & healthcare industries
    
    

The Costs & Benefits of Monopsony Power

Stakeholder	Benefits	Costs
Firms	Reduced costs of production lead to higher profits	May experience some reputational damage for the way they treat their suppliers The continual price pressure on suppliers often results in conflict with them which can be difficult to manage In the long-run, they may drive their suppliers out of business causing supply chain issues
Employees	The higher profits often result in higher wages for the monopsonists employees	Employees may find it difficult to reconcile their ethics/values with the way suppliers are treated
Consumers	Lower average costs for the firm may result in lower prices for consumers	The quality of the product may decrease as suppliers attempt to cut their own costs in response to the price pressure from the monopsonist
Suppliers	Supplying to a large well-known monopoly may enhance the supplier's reputation & open up new opportunities Supplying to a large well-known monopoly may provide an opportunity to increase sales volume	Suppliers may seek to reallocate their resources to more profitable industries leading to less supply in the market (law of supply) Suppliers may be driven out of business