Practise monopsony evaluation by using buyer-power diagrams to judge supplier prices, wages, consumer prices and profit margins.
The global supermarket chain, Walmart, operates 10500 stores in 24 countries. It has monopsony power when buying agricultural products and employing labour in these countries. A 2021 study suggested that Walmart buys these agricultural products at a lower price than when they are sold to other businesses.
Evaluate the likely impacts of monopsony power on employees and suppliers.
Refer to a firm with monopsony power in your answer.
Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make, but this does not imply that any of these must be included. Other relevant points must also be credited.
Quantitative skills assessed:
QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.
- The definition of monopsony - a monopsony is where there is a single buyer in the market
- The definition of monopsony power - where a firm has significant buying power over its suppliers
Impact on suppliers
- Lower prices for their goods because there is no-one else to sell their product to
- Decreasing revenue for the suppliers
- This causes a fall in supernormal profits for the suppliers and potentially puts them out of business if prices fall too low
- Lower producer surplus for suppliers that may prevent them from investing as much, reducing dynamic efficiency
- Less negotiating ability over contracts, which may prevent suppliers from being able to sell their agricultural products to other supermarkets
- Lack of bargaining power may allow monopsonists to pass costs onto suppliers, reducing profit margins
- Increased dependence on one main customer, making them more vulnerable if that customer were to go out of business
Impact on employees
- The monopsony employer has buying power over its potential employees. This gives it wage-setting power in the industry's labour market
- Employment might be lower in the industry as there are less opportunities for workers
- Monopsonies may pay lower wages and provide poorer working conditions compared to a competitive labour market
NB Maximum level 3 if no reference to a firm with monopsony power
Maximum of level 3 if only one economic agent is discussed
Accept reverse argument
Level
Mark
Descriptor
0
No rewardable material.
Level 1
1-3
Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models.
Use of generic material or irrelevant information or inappropriate examples.
Descriptive approach which has no chains of reasoning.
Level 2
4-6
Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.
Limited application of knowledge and understanding to economic problems in context.
A narrow response or superficial, only two-stage chains of reasoning in terms of cause and/or consequence.
Level 3
7-9
Demonstrates accurate knowledge and understanding of economic terms, principles, concepts, theories and models.
Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.
Analysis is clear and coherent. Chains of reasoning in terms of cause and/or consequence are evident but they may not be developed fully or some stages are omitted.
Level 4
10-12
Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models.
Ability to link knowledge and understanding in context using appropriate examples which are fully integrated to address the broad elements of the question.
Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.
Evaluation (8 marks) - indicative content
Suppliers:
- Monopsony may offer more stable contracts guaranteeing demand for the suppliers, this may encourage more investment and dynamic efficiency from the suppliers
- If the monopsony is socially responsible, suppliers may be paid a fair amount for their products
- If monopsony power is weak/not significant, prices might not be that different to a competitive market
- There is often government intervention in monopsony markets that prevents the monopsony from abusing its dominance
- Farmers may organise into cooperatives to increase their bargaining power against the monopsony
- Businesses will attempt to find other alternative routes to market eg, farmers market or farm shop
Employees:
- Job security is likely to be higher than in more competitive markets
- Walmart/the firm may not be the only employer of workers therefore they may pay higher wages than a pure monopsony
- If a trade union exists, wages may be higher depending on the relative bargaining power of the union/monopsony
- Many monopsony employers are governments that do not profit-maximise and may seek to prioritise other objectives such as well-being
Level
Mark
Descriptor
0
No rewardable material.
Level 1
1-3
Identification of generic evaluative comments.
No supporting evidence/reference to context.
No evidence of a logical chain of reasoning.
Level 2
4-6
Evidence of evaluation of alternative approaches.
Some supporting evidence/reference to context.
Evaluation is supported by a partially-developed chain of reasoning.
Level 3
7-8
Evaluation recognises different viewpoints and/or is critical of the evidence, leading to an informed judgement.
Appropriate reference to evidence/context.
Evaluation is supported by a logical chain of reasoning.