With reference to extract 2 and your own knowledge, discuss the impact of supermarket
buying power on their suppliers.
A monopsony exists when there is only one dominant buyer but many sellers in the market.
In the UK, supermarkets tend to have monopsony power over farmers. If farmers do not sell
their goods to supermarkets, there are very few substitutes that they are able to turn to.
The impact of supermarket buying
power on their suppliers may result in
very low selling prices enforced on
suppliers. Line 12 of extract 2 states
“Supermarkets use their buying power
to impose low prices on their
suppliers.” Since supermarkets are the
dominant buyers of fruit, this allows
these firms to set the wage rate as low
as possible. In the diagram above, the
perfect competition equilibrium is at
the point P1Q1. As supermarkets
employ workers up until the point
where MRP=MC, where profit is maximised, this leads to workers being employed at
quantity Q2. The wage rate is then taken directly from the average cost curve and that leads
to the price W3. This depicts the difference between a firm with monopsony power and a
perfectly competitive firm. A firm with monopsony power pays workers lower wages and
has a lower demand for labour compared to a perfectly competitive firm. The difference
between Q1 and Q2 is the fall in employment and the difference between W1 and W2 is the
fall in wages due to firms exploiting monopsonist power. The extent to which workers are
being underpaid can be shown by the difference between W2 and W3, as workers are being
paid less than their MRP. The lower the wage rate is compared to MRP, the greater the
monopsony power that exists in the market. Thus, supermarket buying power leads to very
low prices for suppliers. However, this depends upon whether governments choose to
intervene or not. Given that “The European Commission is developing a Code of Practice
that will encourage supermarkets to improve their global buying practices,” (line 18, extract
2) this may lead to supermarkets having less buying power over suppliers, as the market will
become more regulated. Increased regulation will then force supermarkets to pay suppliers
more, therefore allowing suppliers to pay workers higher wages.
buying power on their suppliers.
A monopsony exists when there is only one dominant buyer but many sellers in the market.
In the UK, supermarkets tend to have monopsony power over farmers. If farmers do not sell
their goods to supermarkets, there are very few substitutes that they are able to turn to.
The impact of supermarket buying
power on their suppliers may result in
very low selling prices enforced on
suppliers. Line 12 of extract 2 states
“Supermarkets use their buying power
to impose low prices on their
suppliers.” Since supermarkets are the
dominant buyers of fruit, this allows
these firms to set the wage rate as low
as possible. In the diagram above, the
perfect competition equilibrium is at
the point P1Q1. As supermarkets
employ workers up until the point
where MRP=MC, where profit is maximised, this leads to workers being employed at
quantity Q2. The wage rate is then taken directly from the average cost curve and that leads
to the price W3. This depicts the difference between a firm with monopsony power and a
perfectly competitive firm. A firm with monopsony power pays workers lower wages and
has a lower demand for labour compared to a perfectly competitive firm. The difference
between Q1 and Q2 is the fall in employment and the difference between W1 and W2 is the
fall in wages due to firms exploiting monopsonist power. The extent to which workers are
being underpaid can be shown by the difference between W2 and W3, as workers are being
paid less than their MRP. The lower the wage rate is compared to MRP, the greater the
monopsony power that exists in the market. Thus, supermarket buying power leads to very
low prices for suppliers. However, this depends upon whether governments choose to
intervene or not. Given that “The European Commission is developing a Code of Practice
that will encourage supermarkets to improve their global buying practices,” (line 18, extract
2) this may lead to supermarkets having less buying power over suppliers, as the market will
become more regulated. Increased regulation will then force supermarkets to pay suppliers
more, therefore allowing suppliers to pay workers higher wages.
