Monopolistic competition   Perfect competition   Oligopoly   Monopoly Market structures and efficiency    Different types market power   Economicstutor..com.au

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Monopoly power versus monopsony power


The primary objective for businesses is to maximise profits.  Given that profits are derived by subtracting expenses (e.g. costs) from revenue (e.g. total sales), businesses will be seeking to maximise revenue and minimise expenses.  Dominant firms will therefore exercise their market power in two primary ways, via the use of monopoly power or monopsony power.  Monopoly power is used to ‘squeeze’ the maximum sum of money from consumers (i.e. maximise revenue).  In contrast, monopsony power rests in being the only, or one of very few, purchasers of  a product, and is used to ‘squeeze’ suppliers as much as possible in order to purchase at the lowest possible cost prices (i.e. minimise expenses).  


Businesses exercise ‘monopoly power’ by manipulating prices in the market for their particular product.  A monopoly business will, by definition, face minimal competition in the market for their product and will use its position of market dominance to charge relatively high prices.  This also applies in oligopolistic market structures, where businesses will typically seek to use their combined market power to extract the most from consumers.  For example, Coles and Woolworths, as an effective duopoly, can exercise their market power by raising prices, knowing that consumers have few alternatives when purchasing groceries.  Similarly, the major banks operating in an oligopoly can charge borrowers relatively high rates on housing loans knowing that home loan borrowers also face relatively limited choice.  


Businesses can exercise ‘monoposony power’ if they are the dominant buyer(s) in a particular market.  Coles and Woolworths, combined, have monopsony power in the market for many grocery items, including fruit and vegetables.  Given that they purchase the bulk of the output from suppliers such as farmers, they have the ability to drive the prices down for many of the items purchased at ‘the farm gate’.  Many farmers sell predominantly (or exclusively) to the supermarkets and are left with few alternatives, particularly in the short term.  Accordingly, they are forced to sell their produce to the supermarket duopolists at very low prices and low margins.  See market power as a market failure.

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