1. Monopsony Data-Response Question
Extract 1: Dairy farmers in row over milk prices
Protests have erupted at several UK dairy processing factories, as farmers
demand a higher price for the milk they produce after firms such as Arla, Dairy
Crest, and Robert Wiseman cut the price they pay to farmers by up to four pence.
Farmers say this puts their survival at risk, particularly at a time when input
costs are rising- particularly feed for their cattle.
The processors say price cuts are necessary, as they themselves are making
losses when they sell milk on to the supermarkets. Currently, it is estimated that
supermarket’s average gross margin- the difference between the price they sell
milk to customers for and the price they pay for that milk- is 34%, suggesting
they do have considerable power over the price they pay for milk.
In response to the protests, supermarkets have agreed to small increases in the
price they pay for milk, but it remains to be seen if this will be enough to satisfy
the farmers’ demands.
(Source: BBC News)
Figure 1: Example Price Breakdown for 4 pints of milk
Extract 2: Government to introduce fines for supermarkets
breaching Groceries Code
The Groceries Code, which aims to regulate supermarkets’ relationships with
their suppliers, is to be strengthened with the appointment of an adjudicator.
"Where supermarkets are breaking the rules with suppliers and treating them
unfairly, the adjudicator will make sure that they are held to account," said
Competition Minister Jo Swinson. This will, as ‘a last resort’, include the option to
fine companies that fail to meet their obligations to suppliers.

2. Food suppliers can complain anonymously to the adjudicator if they are being
treated unfairly. This could include:
- supermarkets demanding price cuts in order for firms to keep contracts
- suppliers being asked to fund price promotions such as BOGOF
- firmspaying a lump sum to keep their products on the shelves
- late payments to suppliers
- unsold product returned to the supplier, unpaid for
However, the British Retail Consortium is against the plans, believing them to be
unnecessary. Stephen Robertson, director general of the British Retail
Consortium, said: "With an independent budget and no direct reporting line to
the OFT or government, this is a quango. Quango's cost. This will reduce the
efficiency of the supply chain and customers will pay the price."
(Source: BBC News & www.europe-economics.com)
Extract 3: Supermarkets & their suppliers: An investigation
In the UK food market in 2011, the 4-firm concentration ratio was 76%. By
contrast, the number of food and food-product producers was around 7,000 in
2008 according to the Competition Commission.
(Source: www.europe-economics.com)
Figure 3: Potential long term effects of supermarket price
squeeze
(Source:www.europe-economics.com)
Questions
1. Explain, with reference to the data, what is meant by ‘monopsony power’
(4 marks)
2. Evaluate the UK government’s decision to create a ‘groceries adjudicator’
(12 marks)
3. Assess the impact on both producers and consumers of the monopsony
position of UK supermarkets (16 marks)