Case study question - Monopsony

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Case study question - Monopsony

  1. 1. Monopsony Data-Response QuestionExtract 1: Dairy farmers in row over milk pricesProtests have erupted at several UK dairy processing factories, as farmersdemand a higher price for the milk they produce after firms such as Arla, DairyCrest, and Robert Wiseman cut the price they pay to farmers by up to four pence.Farmers say this puts their survival at risk, particularly at a time when inputcosts are rising- particularly feed for their cattle.The processors say price cuts are necessary, as they themselves are makinglosses when they sell milk on to the supermarkets. Currently, it is estimated thatsupermarket’s average gross margin- the difference between the price they sellmilk to customers for and the price they pay for that milk- is 34%, suggestingthey do have considerable power over the price they pay for milk.In response to the protests, supermarkets have agreed to small increases in theprice they pay for milk, but it remains to be seen if this will be enough to satisfythe farmers’ demands.(Source: BBC News)Figure 1: Example Price Breakdown for 4 pints of milkExtract 2: Government to introduce fines for supermarketsbreaching Groceries CodeThe Groceries Code, which aims to regulate supermarkets’ relationships withtheir suppliers, is to be strengthened with the appointment of an adjudicator."Where supermarkets are breaking the rules with suppliers and treating themunfairly, the adjudicator will make sure that they are held to account," saidCompetition Minister Jo Swinson. This will, as ‘a last resort’, include the option tofine companies that fail to meet their obligations to suppliers.
  2. 2. Food suppliers can complain anonymously to the adjudicator if they are beingtreated unfairly. This could include: - supermarkets demanding price cuts in order for firms to keep contracts - suppliers being asked to fund price promotions such as BOGOF - firmspaying a lump sum to keep their products on the shelves - late payments to suppliers - unsold product returned to the supplier, unpaid forHowever, the British Retail Consortium is against the plans, believing them to beunnecessary. Stephen Robertson, director general of the British RetailConsortium, said: "With an independent budget and no direct reporting line tothe OFT or government, this is a quango. Quangos cost. This will reduce theefficiency of the supply chain and customers will pay the price."(Source: BBC News & www.europe-economics.com)Extract 3: Supermarkets & their suppliers: An investigationIn the UK food market in 2011, the 4-firm concentration ratio was 76%. Bycontrast, the number of food and food-product producers was around 7,000 in2008 according to the Competition Commission.(Source: www.europe-economics.com)Figure 3: Potential long term effects of supermarket pricesqueeze(Source:www.europe-economics.com)Questions 1. Explain, with reference to the data, what is meant by ‘monopsony power’ (4 marks) 2. Evaluate the UK government’s decision to create a ‘groceries adjudicator’ (12 marks) 3. Assess the impact on both producers and consumers of the monopsony position of UK supermarkets (16 marks)

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