10.6. Monopsony Power
Monopsony power is the buyer’s ability to affect the price of a product. Though pure monopsony is rare, there are some markets where only little numbers of individual firms compete with each otheras buyers. In such markets each buyer enjoys some monopsony power and influence the price of a product.
The best example of monopsony power is the automobile market of the US where the major auto makers are competing among themselves as consumers of tires. Each of them has more or less monopsony power in the tire market. General Motor, the biggest auto maker in the United States, exerts a great monopsony power when selecting a tire manufacturer or the suppliers of other automobile accessories.
Price of a product is equivalent to marginal value in the competitive market. But a market, which is driven by monopsony power of a buyer, goods are often sold at a price lower than marginal value. Price is determined considering the resistance of supply the buyer is facing. In a case of very elastic supply (Es is large), there is not much difference between price valueand marginal value, and the buyer cannot exert high monopsony power. In contrast, if source is very inelastic then price will be much lower than the marginal value and its buyer will exert higher monopsony power on the market.
Determinants of Monopsony Power
There are three factors which determine degree of monopsony power: Elasticity of market supply, number of consumers who are present in the market, along with that the manner those consumers interact among themselves.
Elasticity of Market Supply
Degree of monopsony power depends a lot on elasticity of market supply. If we consider the part of monopsonist, itwill be in profit side. If it faces upward-sloping supply curve which indicates thatmarginal expenditure is more than average expenditure.
If supply curve is less elastic, it results in greater average expenditure and marginal expenditure differentiation that enables the buyers to enjoy higher monopsony power.
Monopsony power of a pure monopsonist totally depends on elasticity of market supply. Higher the elasticity of supply, little the monopoly power is and the sole buyer enjoys a little benefit.
Number of consumers in the market
Degree of monopsony power depends a lot on amount of buyers present in the market. If we consider buyers are more, then a sole buyer cannot exert much force on price. As a result, the supply curve is too elastic and the market turns into a competitive market. A market with limited buyers is highly affected by its monopsony power.
The way of interaction among the consumers
Mpnopsony power is very much dependent on buyers’ approach. For example, if there are 3 or 4 buyers who are competing with each other for a single aggressively and quote a price almost equal to the marginal value of produced product then they will be left with less monopsony power. But if those buyers do not compete aggressively, or even get united, the price will continue to remain less than the marginal value and the degree of monopsony power will be high.
Evaluating the degree of buyers’ monopsony power is not simple because there are so many factors which decides the degree of monopsony power. Though it is possible to count buyers and estimating elasticity of supply curve, ascertaining the way of interaction among buyers is very difficult.
Impact of monopsony power on the society
Monopsony power is beneficial for the buyer because prices are less than the marginal value but sellers are at losing end. It is important to determine the impact of monopsony power on both buyers and sellers. To evaluate this, we need to compare the presence of buyer plus seller of a competitive market which are driven by monopsony power. For this we should consider average and marginal outflow curves along with marginal value curve. Monopsonist enjoys the maximum net benefit when a quantity (Qm) is purchased at a price (Pm)so that the marginal value is equivalent to marginal expenditure.
Taking the case of competitive market, where price is equivalent to marginal value, the competitive price (Pc) and competitive quantity (Qc) are found when average expenditure intersects with marginal value curves.
With monopsony power, both price and quantity sold are less. Sellers lose a portion of surplus due to the lower price and reduced sales. However, by purchasing at a lower price, the consumer gains in terms of the surplus. In terms of quantity, a buyer purchases lesser than the buyers in competitive market. Overall, monoposony power costs net loss of surplus to the society. Even if a tax is removed from the monopsonist’s gains and then redistributed to producers, it would result in inefficiency, as output value would be lower compared to that of the competitive market.
Bilateral Monopoly
Bilateral monopoly is a term used to define a market which has only one seller and only one consumer. It is very tough to figure out price and quantity in a bipolar market, as both the seller and the buyer are in a position to bargain.
There is no simple way to determine either the seller or the buyer will be the winner in the bargaining process. That party who have more time, patience and convincing power will be the winner.
Bilateral monopoly is unusual. Usually, we find some markets where exist a little number of sellers who have gained monopoly power and a limited buyers who some monopsony power. A rough principle can be applied in such markets to determine the result of bargaining between the sellers and the buyers. Here, both the monopoly power and the monopsony power islikely to offset each other. It can be said that the sellers’ monopoly power will be counter by the buyers’ monopsony power, and vice versa.
A market with bipolar monopoly is also unable to bring perfect competition in the market. It is because if monopoly power affects more the price compared to the monopsony power, the value of residual monopoly power continues to be important. Generally, monopsony power has the potential to push price more towards the marginal cost, while monopoly power will markdown the price value closer to the marginal value.
10.7 The Antitrust Laws to Limit Market Power
Market power, either monopoly power or monopsony power, is not favourable for economic growth of a country because it has several negative impacts on the society. Market power is a constraint for having potential purchasers to purchase products at competitive rates. Additionally, market power minimizes output, leading to a deadweight loss to the society.
Extreme market power also creates the problems of inequity and unfair practices. If a seller has acquired monopoly power, then he or she would enjoy profit at the cost of consumers. Theoretically, the extra profits of a firm tax away and redistribute among its buyers; however, such redistribution is mostly impractical. It is not easy to determine the portion of a profit to attribute to monopoly power, and to identify all buyers so that it refunds them according to the ratio of their purchases.
How a society can impose a restriction on market power which prevents it from being used as an anticompetitive? In a case of natural monopoly of electric utility company, considering of direct price guideline is its solution. Effective measures are necessary to restrict the companies from gaining extreme market power that would come fromunions and purchase, and to restrict companies, who have market power.
The governments of the United States and several countries have introduced antitrust laws to limit market power. The antitrust laws include rules and regulations to create a competitive economy by barring actions which could prevent competition in the market. Every country has its own antitrust law.
In the United States and somewhere else, where limitations that include colluding with another company is present, monopoly or market power is not considered as illegal in such places. In contrast, we have noticed patent and copyright laws secure the monopoly status of the companies which developed unique inventions.
For instance, Microsoft has a near-monopoly in developing operating system for personal computers and other software companies are restricted from copying Windows. Microsoft’s monopoly in operating systems cannot be considered as illegal. But if the company exerts monopoly power in the personal computer operating systems to restrict other software companies from launching new operating system for personal computers to reduce competition then it could be illegal.
Restricting the Rights of Firms
When any pharmaceutical company invents new life-saving drug and Apple’s success in inventing the new products iPhone and iPad, it results in economic growth and enhancement of consumer welfare. The antitrust law is required to prevent the companies from enjoying market power through the process which are not so laudable. The antitrust laws work are discussed in the below section at fundamental level.
The Sherman Act (passed in 1890) in its section 1 bans contracts or conspiracies to bring trade under control. An example of illegal combination is- we can consider an open agreement among companies to do production in limited amount or to fix a price more than the competitive price. There has been multiple numbers of instances where we can see practice of illegal combinations and conspiracies.
Hidden collusion of parallel conduct is also against the law. For instance, if Firm X continuously follows Firm Y’s pricing, and if Firm X’s activity is different from that which was expected from the two companies in absence of collusion, a hidden collusion may be inferred.
The Sherman Act in its section 2 has termed monopolizing or intention to control a market as illegal practice. It also prohibits conspiracies which lead to monopolization.
The Clayton Act (1914) has pinpointed the types of practices which could be anticompetitive. For instance, the act said that it is unlawful if a company needs buyers who do not buy goods from a competitor. The act also considers it illegal to get in involved in predatory pricing. Predatory pricing is the pricing which is designed to drive existing competitors out of the business and to stop new entrants. This is because the predatory company could continue and enjoy greatervalues in the future.
A firm can gain monopoly power by merging with larger firms, or by acquiring a firm or by taking controller of another firm which has potential to create a monopoly.
The amended Clayton Act (1936) states that discriminating among buyers by charging different prices from different buyers for the same product to prevent competition is illegal. Even the firms try to justify that the price differences are necessary to meet the competition, it is an illegal practice.
Supplementing the Sherman and Clayton acts in the market concerns, the Federal Trade Commission Act fosters competition through a complete set of barring against anticompetitive and unfair practices, which include deceptive advertisement and branding, agreements with retailers so that they could exclude opposing brands, and many more. The FTC Act offers extensive powers compared to other acts, as the aforesaid prohibitions are explained and put into practice in organizational proceedings prior to the FTC.
Actually, the antitrust laws are phrased vaguely considering what is allowed and not allowed. The antitrust laws aim to provide general statutory framework so that it offers the Justice Department of the FTC and the courts extended justification to interpret and apply them. It is an important approach, as it is difficult to determine the obstruction to competition beforehand. Such vagueness generates the necessity for general law and alternate provisions and rulings.
Implementation of the Antitrust Laws in the US
In the US the antitrust laws are implemented in three ways:
1. Through Antitrust Division of Department of Justice
Theimplement of its policies according to the outlook of the administration is in power. The department can begin a criminal proceeding or bring a civil suit, or take both the actions in response to the external complaint. The criminal actions different for corporation and individuals. The corporations can slapped be with penalties, while individuals can be either slapped with penalties or sentenced imprisonment. For example, if the antitrust department finds individuals are engaged in conspiracy to fix prices or rigging bids then those can be charged and the culprits may be sentenced to imprisonment. It is noteworthy that if you have an intention to parlay your understanding of microeconomics then the business career would be successful! Losing a civil proceeding compels a corporation to stop its anticompetitive practices and sometime to pay damages.
2. Through administrative procedures of Federal Trade Commission
In response to an external compliant or from the FTC’s own initiative actions are taken against those who promote anticompetitive or unfair market practices. Before deciding which action is to be taken against those who are found guilty, FTC can seek a voluntary considerate to abide by the law or request formal command order for requiring compliance.
3. Through the private proceedings
Individuals and firms can take a party to the court for causing treble damages to their business or property. Individuals or firms can also request the courts to impose ban against the wrongdoers for restraining anticompetitive actions.
The antitrust laws of the United States are more severe and far reaching compared to those of other countries. In reality, some people have justified that they have restrained American industry effectively in global markets. The laws surely prevent American business and at some point of time have taken American companies at a difficult position in the international markets.
However, the negative aspects of the United States’ antitrust laws are overshadowed by their benefits: The antitrust laws have been vital to keep the market competitive, and competition is necessary for economic efficiency, modernization and development.
Antitrust Laws in Europe
With the development of European Union, it has also developed the method of implementing antitrust laws. The responsibility for implementing the antitrust concerns which comprises of more than two member states is available, the Brussels-based Competition Directorate. Each member state has separate, distinct and antitrust authorities who are responsible for these types of concerns whose consequences are felt greatly or entirely within specific countries.
There are lots of similarities between the antitrust laws of European Union and United States. However, lots of substantive and procedural variations also exist between the antitrust laws in the European Union and United States. In Europe, merger evaluations usually are carried out promptly and it is simpler to establish that a Europe-based company is dominant, while in the United States it is quite tough to prove the monopoly power of a company.
Though European Union and United States have been actively implementing laws against the value of price fixing, in Europe just civil penalties are imposed and in the United States both imprisonment and financial penalties are imposed.
Over the last ten years, implementation of antitrust laws has increased rapidly across the world. At present, in more than one hundred countries there exist active enforcement agencies for this purpose. There is no formal global antitrust enforcement body but the International Competition Network sponsors a meeting at least once in a year where all the enforcement agencies meet together.
Links of Previous Main Topic:-
- Introduction Markets and Prices Preliminaries
- The Basics of Supply And Demand
- Consumer Behavior
- Appendix to Chapter 4 Demand Theory a Mathematical Treatment
- Uncertainty and Consumer Behavior
- Production
- The Cost of Production
- Production and Cost Theory A Mathematical Treatment
- Cost in the Long Run
- The Cost of Production Production with Two Outputs
- Profit Maximization and Competitive Supply
- The Analysis of Competitive Markets
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