Monopsony

A market dominated by a single buyer. A monopsonist has the MARKET POWER to

set thePRICE of whatever it is buying (from raw materials to LABOUR).
Under PERFECT COMPETITION, by contrast, no individual buyer is big enough to
affect the market price of anything.
Monopsony is an important idea in economics but not often discussed in the media
indeed there were only six references to it in the Financial Times between 2003 and
2009!
But for economists wanting to understand changes in the balance of
power between buyers and sellers in different markets and how this affects prices,
profit margins and incentives, it is important to have an understanding of
monopsony and its effects.
What is monopsony power?
A monopsonist has buying or bargaining 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 cost of purchasing inputs increases their profit margins.
Monopsony exists in both product and labour markets in this chapter we focus on
buying power in the markets for goods and services.
Examples of industries where monopsony power exists and persists:
Electricity generators can negotiate lower prices for coal and gas supply contracts
Food retailers have power when purchasing supplies from farmers, milk producers,
wine growers and other suppliers. Tesco, Sainsbury, Wal-Mart-Asda and CooperativeSomerfield haveoligopsony power when it comes to purchasing products from
businesses at earlier stages of the supply-chain.
A car-rental firm seeking a contract to a manufacturer to supply new cars for their
fleet
Low-cost airlines getting a favourable price when purchasing a new fleet of aircraft
British Sugar buys almost the entire sugar beet crop produced in the UK year
Amazons buying power in the retail book market it gets a better price than other
booksellers and this gives it a significant competitive advantage.
The increasing buying power of countries for example China in securing deals to
buy mineral deposits from other countries often in less developed nations in
Africa.

The government is a major buyer e.g. in military procurement and might be able
to use this bargaining power when confirming contracts for new military equipment
and supplies. The National Health Service is another example of a dominant buyer
in this case as a purchaser of prescription drugs from the pharmaceutical
companies.
In evaluation it is important to remember some of the possible advantages from
monopsony power:
Improved value for money for example the UK national health service can use
its bargaining power to drive down the prices of routine drugs used in NHS
treatments and ultimately this means that cost savings allow for more treatments
within the NHS budget.
Producer surplus has a value as well as consumer surplus lower input costs will
raise profitability that might be used to fund capital investment and research.
A monopsonist can act as a useful counter-weight to the selling power of a
monopolist e.g. the NHS versus the global pharmaceutical companies.
In most supply chain relationships for example between supermarkets and their
suppliers the long term sustainability of an industry requires that both benefit if
there are no mutually beneficialgains from trade, ultimately trade and exchange
will break down.
The growth of the Fair Trade label and organisation is evidence of how pressure
from consumers can lead to improved contracts and prices for farmers in
developing countries. For example if tea producers in Rwanda get a stronger price
for their output, the increased income and profit will have important economic and
social benefits for the exporting industry and the wider economy.
1.What is the momentum of a 23 Kg cannon shell going 530 m/s?
(12190 Kgm/s)
2.What speed must a 5 Kg object go to have 24 Kgm/s of momentum?
(4.8 m/s)
3.A bullet going 640 m/s has 42 Kgm/s of momentum. What is its mass?
(66 g or .066 Kg)
4.What is the impulse imparted by a rocket that exerts 4.8 N for 1.63 seconds?
(7.8 Ns)
5.For what time must you exert a force of 45 N to get an impulse of 16 Ns?
(.36 s)

1. Calculate the momentum of a 0.15 kg ball that is moving toward home plate at a
velocity of 40m/s.
2. Which has greater momentum, a 2.0kg hockey puck moving east at 2.5m/s or a
1.3kg hockey puck moving south at 3.0m/s?
3. A track athlete throws a 2kg discus into a field with a velocity of 21m/s. What is
the momentum of the discus?
4. Calculate the momentum of a 700g ball that is rolling down a ramp at 4.6m/s.
5. A cannon fires a 40.5kg shell toward a target and the shell moves with a velocity
of 120m/s. Calculate the shell's momentum.