Monopsony

Specification Coverage: Edexcel unit 3.4.6 - Monopsony. Students should be able to understand what a monopsony is, identify the conditions under which monopsony power arises, and evaluate the costs and benefits of that power for the firm itself, for consumers, for workers and for suppliers. The monopsony labour market diagram, minimum wages and trade unions are covered in 3.5.3 Wage Determination.

What Is a Monopsony?

A monopsony is a market with a single buyer of a good, service, or factor of production.

Examples include a large supermarket chain buying from farmers, the NHS hiring nurses, or a major manufacturer in a small town.

Key Characteristics and Conditions

  • Price/Wage Makers: The monopsonist can influence the wage or price paid to workers or suppliers, often resulting in lower wages and reduced employment compared to a competitive market.
  • Profit Maximisation: The monopsonist seeks to maximise profits by choosing the optimal level of employment or quantity to hire or buy.
  • Dominant Buyer: The monopsonist is the dominant buyer in the market, purchasing a significant quantity of raw materials from suppliers or employing a large number of workers, giving it significant market power.

Costs and Benefits of Monopsony

Agent Benefits Costs
Firms Lower wages and reduced costs of production, leading to higher profits. Potential for reduced productivity and morale among workers, as well as negative public perception.
Consumers Lower prices for goods and services due to reduced production costs. Potential for reduced product quality and limited choice if the monopsonist exerts too much control over the market.
Workers Higher employment levels and better working conditions if the monopsonist is regulated. Lower wages and reduced job security due to the monopsonist's market power.
Suppliers Stable demand for their products, long-term contracts, and potential for higher prices due to the monopsonist's market power. Reduced bargaining power, lower prices, and potential for delayed payments or non-payment due to the monopsonist's market power.

Monopsonies in labour markets are covered in further detail in 3.5.3 Wage Determination.

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Six original multiple-choice questions on what a monopsony is, and how a dominant buyer affects its suppliers, its workers and its customers.

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Three questions on Monopsony from the Edexcel A-Level papers, 2017–2020, 8 to 25 marks. Each one links straight to the page of the official mark scheme where its answer begins.

Past Paper Questions: 3.4.6 Monopsony