Revision presentation on aspects of monopsony power in markets

1. A2 Micro
Monopsony Power
Tutor2u, Summer 2013

2. Monopsony Power in Markets

3. Effects of Monopsony on Welfare
Examples: Monopsony
• 1: Food retailers
• 2: Electricity generators
• 3: Coffee / cocoa roasters
• 4: Amazon / Apple
• 5: National Health Service

4. Authors/Agents
Wholesalers
Retailers
Consumers
Publishers/Distributors
Bookstores
Chains
Independent
Bookstores
Supermarkets
Internet
Retailers
Book Clubs
The Book Market Supply Chain –
monopsony power for major buyers
Good to link
monopsony power
with vertical
integration

5. Amazon – Market Power
Volume Value
% %
Chain bookshops* 29 36
Independent bookshops 4 5
Bargain bookshops 9 4
Supermarkets 13 10
Other shops 12 8
Book clubs 6 6
Internet-only retailers# 27 31
* Waterstone’s, WHSmith, Blackwell
# Internet only – e.g. Amazon, Play.com
Internet Only Book Sales in
UK (2011)
Market
share
Amazon 70%
The Book Depository 4-5%
Play.com 3-4%
Others (including
publishers’ direct)
22%

6. Amazon’s Monopsony Power
How does Amazon gain from
monopsony power?
• 1: Cheaper prices from
publishers
• 2: Charges a premium for
sellers on Market Place
• 3: Ability to under-cut
other book retail channels

7. Amazon and Economies of Scope
Amazon launched its
groceries range in
July 2010. It now
offers in excess of
150,000 products,
from crisps to
nappies, which are
typically sold in bulk
Do you know the
difference between
scale and scope
economies?

8. The effect of monopsony on welfare
What can producers do if faced
with monopsony power?
• 1: Form co-operatives
• 2: Lobby competition
authorities
• 3: Build retail channels e.g.
small bookshops going online

9. Monopsony Power in Labour Markets

10. Wage
Labour
(Employment)
Monopsony Power in Labour Markets – Lower Wages?
Monopsony Employer
MC labour
Labour
Demand
(MRPL)
Labour
supply
Profit maximising employment
level is where MRPL = MC labour
This gives employment of E1 – the
marginal revenue product is W1
But employer needs only pay an
average weekly wage of W2 to
hire these workers
Monopsony employer using their
buying wage to pay wages below
the fair value of output from their
employees
An abuse of market power?
A cause of relative poverty?
W1
W2
E1

12. Monopsony Power in Labour Markets – Minimum Wages
Wage Possible Effects of a Minimum Wage
Labour
(Employment)
MC labour
Labour
Demand
(MRPL)
Labour
supply
Minimum wage is a pay floor
Minimum hourly pay rate
Must be set above usual free
market wage
Monopsonist must pay this wage
Employment rises to E2
More people employed at a higher
wage
Other factors affecting wages are
held constant in this analysis
Min
Wage
E2
W2
E1

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