3.4.6 Monopsony — Practice Questions

Six original multiple-choice questions on monopsony and buyer power, written to the style and difficulty of Edexcel Paper 1 Section A.

6 questions Edexcel A-Level Multiple choice Model answers included

Not read the notes yet? Start with the 3.4.6 Monopsony revision notes.

1. 1. A market in which a single dominant buyer purchases most of what is sold is called

   Definition in context

   Select one answer

   A A cartel.

   B A monopoly.

   C A monopsony.

   D An oligopoly.
   Show model answer

   Answer: C (A monopsony.). A monopoly has one dominant seller; a monopsony has one dominant buyer. The power runs in the opposite direction — instead of holding prices up against consumers, the monopsonist holds them down against whoever it buys from. Edexcel's definition covers any market: a single buyer of a good, a service or a factor of production. The examples on the page are a supermarket chain buying from farmers, the NHS hiring nurses, and a large manufacturer in a small town.

   Why the other options are wrong

   • A — A cartel is a group of sellers agreeing to restrict supply and raise the price between them.
   • B — A monopoly is the mirror image — one seller rather than one buyer.
   • D — An oligopoly is a few large firms selling, not one firm buying.

2. 2. A supermarket group buys three-quarters of a region's milk, and the farmers have no realistic alternative outlet. The most likely consequence for those farmers is

   Applied reasoning

   Select one answer

   A Higher prices, since the group needs their milk.

   B Lower prices, since they cannot sell elsewhere.

   C No change, since the milk price is set nationally.

   D Stable prices, since the group signs long contracts.
   Show model answer

   Answer: B (Lower prices, since they cannot sell elsewhere.). What decides this is the farmers' bargaining position. With three-quarters of the region's demand in one buyer's hands, refusing its offer means having nowhere to sell perishable milk. The supermarket can therefore push the price down towards the farmers' costs and keep the difference. Edexcel lists reduced bargaining power and lower prices as the principal cost of monopsony to suppliers, alongside the risk of delayed or withheld payment.

   Why the other options are wrong

   • A — Needing the milk would matter if the farmers had other buyers to turn to. They have none, so the dependence runs the other way.
   • C — Nothing here sets a national price. The group negotiates directly with its own suppliers.
   • D — Long-term contracts are among the benefits Edexcel lists for suppliers, and stable demand is real — but stability is about volume, not about the price being favourable.

3. 3. Table 1 lists four effects of one firm holding monopsony power in its market.
   From Table 1, the effect that harms rather than helps is

   Data interpretation

   Table 1: Four effects of a dominant buyer in one market

   	Effect
   Effect 1	The buyer's costs of production fall
   Effect 2	Shoppers pay less at the till
   Effect 3	Suppliers have a stable, predictable order book
   Effect 4	Suppliers wait far longer to be paid

   Select one answer

   A Effect 1.

   B Effect 2.

   C Effect 3.

   D Effect 4.
   Show model answer

   Answer: D (Effect 4.). Edexcel sets the costs and benefits of monopsony out by stakeholder, and delayed payment sits squarely on the cost side for suppliers — a firm with nowhere else to sell is in no position to insist on prompt settlement. The other three are benefits: lower input costs for the buyer, lower prices passed on to shoppers, and the one students usually miss, the genuine advantage to suppliers of a large and reliable customer placing regular orders.

   Why the other options are wrong

   • A — Lower production costs are the benefit the buyer gets from its position, and the reason it wants that position.
   • B — Those lower costs being passed on is the standard consumer benefit of monopsony, and the main argument made in its defence.
   • C — Stable demand and long-term contracts are listed by Edexcel among the benefits to suppliers, even though the price they receive is lower.

4. 4. Monopsony power is often defended on consumers' behalf. The argument is that a dominant buyer

   Applied reasoning

   Select one answer

   A Guarantees that suppliers are treated fairly.

   B Improves the quality of what suppliers produce.

   C Removes the need for any competition policy.

   D Sells more cheaply because it buys more cheaply.
   Show model answer

   Answer: D (Sells more cheaply because it buys more cheaply.). The defence rests on buyer power and seller power working in opposite directions for consumers. A monopolist raises the price it charges; a monopsonist lowers the price it pays, and in a competitive retail market it has to hand at least part of that saving on or lose custom. Edexcel lists lower prices for consumers as the main benefit of monopsony. How much force the argument has depends entirely on whether the buyer faces real competition when it comes to sell.

   Why the other options are wrong

   • A — The opposite. Suppliers' bargaining power is exactly what a monopsonist erodes.
   • B — Edexcel notes the risk that quality falls, as suppliers squeezed on price cut corners in order to survive.
   • C — Monopsony power is one of the things competition authorities examine, not a substitute for having them.

5. 5. A large employer in a small town pays noticeably below the going rate, because its workers have few alternatives. The cost this creates for the employer itself is

   Applied reasoning

   Select one answer

   A Higher production costs in the short run.

   B Lower morale and productivity among staff.

   C The loss of its dominant position in the town.

   D Tighter regulation of the wages it may offer.
   Show model answer

   Answer: B (Lower morale and productivity among staff.). The whole point of monopsony power is that it lowers costs, so the drawback cannot be a cost the firm pays out directly. It is what underpaying does to the people doing the work. Edexcel lists reduced productivity and morale among the costs of monopsony to firms, along with the reputational damage of being seen to exploit the position. Output per worker falls, and that offsets part of the saving on the wage bill.

   Why the other options are wrong

   • A — Paying less lowers production costs. That is the reason the firm does it.
   • C — Nothing in the stem threatens its position — the workers' lack of alternatives is exactly what sustains it.
   • D — Regulation is a possible government response, not a cost the firm's own behaviour automatically brings about.

6. 6. A firm holds a dominant position both as the only seller in its output market and as the only buyer in its input market. Compared with a firm holding just one of those positions, its profit margin is likely to be

   Applied reasoning

   Select one answer

   A Greater, since it lifts prices and cuts costs.

   B Narrower, since regulators will intervene twice.

   C Unchanged, since the two powers cancel out.

   D Wider only if it is productively efficient.
   Show model answer

   Answer: A (Greater, since it lifts prices and cuts costs.). The two kinds of market power act on opposite ends of the same account. Monopoly power raises the price the firm receives from its customers; monopsony power lowers the price it pays its suppliers and its workers. Holding both widens the gap from both directions at once — which is why competition authorities examine buyer power as well as seller power. A firm can do real harm through the terms it dictates to suppliers even where its retail prices look perfectly competitive.

   Why the other options are wrong

   • B — Regulators may well take an interest, but the question asks what the position does to the margin, and intervention is neither automatic nor the direct effect.
   • C — The two powers reinforce one another rather than cancelling. They operate on entirely different transactions.
   • D — Nothing about holding market power requires a firm to produce at minimum average cost, and firms with market power typically do not.