Monopsony power exists when a single buyer or an association of buyers can dictate the prices they pay to suppliers, or control other aspects of the relationship that exists between themselves and their suppliers.
Monopsony power in labour markets
In the case of labour markets, monopsonists can exert their buying power in a number of ways, including:
- Setting wages below the market equilibrium.
- Determining the number of workers they hire – which may be below the market level of employment.
- Reducing the security of employment by offering contracts which do not guarantee a particular number of hours of work.
Monopsony power in product markets
- In terms of product markets, monopsonists can similarly exert their buying power in serveral ways, including:
- Setting prices lower that in a competitive market with many competing buyers.
- Requiring suppliers to cover costs which typically the buyer might pay, such as packaging, labelling and advertising costs.
- Forcing suppliers to make lump sum payments to the monopsonist, for example, for access to particular positions in stores and outlets, or to pay for product wastage.
- Delaying payments to suppliers to improve the monopsonist’s cash flow.
Measures to control monopsony power
Governments and regulators, can attempt to control monopsony power in several ways, including:
- Setting up a specific regulator to monitor the activities of firms with monopsony power, such as the UK’s Groceries Code Adjudicator (GCA). The GCA, which adjudicates on issues relating to the groceries supply code of practice, came into force in 2013 and monitors the trading practices of the 10 regulated grocery retailers that have an annual turnover of more than £1 billion, and promotes what it calls ‘fair dealing’ in the supermarket sector.
- Fines for firms exploiting monopsony power, such as the fines that can be imposed by the GCA. The GCA can impose fines of up to 1% of their annual UK turnover.
- Controlling prices paid to suppliers – such as setting minimum prices.
- Subsidising suppliers who are adversely affected by the exertion of monopsony power.
- Legislate against late payments.
- Prevent further monopsony power by blocking mergers or by forcing firms to divest outlets or divisions of their business.
- Measures designed to encourage new entrants into the industry.