More on Monopsony Power

From the Guardian: "Retail Watchdog may be on trail of bullyboys whose threats drive down prices"
At last, it is said, competition watchdogs have found the "smoking gun" they have spent years hunting for: hard evidence that the big supermarkets use their muscle to bully suppliers and extract unreasonable price cuts. ... The Competition Commission, which is nearing the end of its third full-scale inquiry into the grocery business in seven years, last week ordered Asda and Tesco to hand over millions of emails sent and received over a five-week period in June and July. ... In the last competition inquiry one supplier told the watchdog that, "it would be commercial suicide for any supplier to give a true and honest account" of their dealings with the big retailers.
Read the article to see all the techniques that they use to squeeze suppliers. It's quite an education. Asda is, of course, owned by Walmart. [Monopsony is where there are only a small number of buyers as opposed to monopoly where there are only a small number of sellers.]

8 Responses to “More on Monopsony Power”

  1. UncleBob says:

    “Asda, is of course, owned Walmart.”

    errr… grammar check? πŸ˜‰

    Anywhoo, so I’m left wondering, who should have the power in the entire “Free Market” relationship? The Buyer or the Seller?

  2. OK, I fixed the comma.

    As to monopsony power we have discussed this frequently on this site.

    In general the seller has the advantage because they know more about the transaction than the buyer. Just think of used cars as the prototypical example.

    Monopsony power in industry is less frequent than monopoly power, but with the consolidation of firms is becoming more common. Auto parts makers are a perfect example. The ones that have been spun off really haven’t been able to diversify their customer base.

    Originally it only applied to labor markets, as in a company mining town where the monopsony hiring power determined wages.

    To answer your question, the best deal is when both sides have equal power and knowledge. Textbook studies of markets tend to oversimplify this. However the simplification suits the free-marketeers and libertarians just fine.

  3. UncleBob says:

    It’s still not right… πŸ˜‰
    Try adding “by” in there…. πŸ˜‰

    Anywhoo, so buyers and sellers should have equal power… Ultimately, that’s what a free market is? Buyers choose who to buy from, when to buy from them, how much they want to buy and what they want to pay for it. Sellers choose who they want to sell too, when they want to sell it to them, how much they want to sell and what they want to sell it for.

    It seems like a fairly equal relationship to me… And it seems to be what we have now (if you take the government regulation of out the equation, that is…)

  4. wal-mole says:

    where is the link to the article?

  5. Wal-mole:
    Its in the first line, “Guardian”, they just don’t call it a monopsony. In fact that the business practices are being investigated by the UK “monopoly” agency shows that many regulatory bodies have yet to catch up with changing business practices.

    They know something is wrong, but are still not quite sure how to deal with it.

    Unclebob:
    You need to follow the news a bit more closely if you think “And it seems to be what we have now (if you take the government regulation of out the equation, that isÒ€¦)”

    Have you read Charles Fishman’s book, “The Wal-mart Effect”? He details several cases of monopsony power.

  6. UncleBob says:

    blah blah blah… I’ve heard the entire argument before that companies can’t afford *not* to sell at Wal*Mart. Yet it’s all bull crap.

    Look at one of the world’s largest shoe makers – Nike. They do just fine and I don’t believe they sell at Wal*Mart. Levi’s was doing just great until they decided they had to be “Number One” and sell at Wal*Mart as well.

    Heck, this very blog has a great little article about how a company does not have to sell to Wal*Mart to do well.
    http://thewritingonthewal.net/?p=734

    The fact is, yes, a company can make crap loads of money *right now* if they choose to sell at Wal*Mart. But in the end, it is a choice they make. If they don’t want to sell there, they can sell elsewhere – and if they have a good enough product, people will go elsewhere to get it.

  7. Bob, I take it, then, that you haven’t read the book.

    Companies have to make ‘crap loads of money “right now”‘ if they are going to meet the demands of Wall Street. Wall Street has no interest in long-term strategies or building a business for an eventual payoff. If you miss the earnings estimates of “experts” by even a penny your stock gets clobbered and you, Mr. CEO, are at risk of looking for a new job.

    All of us here are amazed that this hasn’t happened to Lee Scott. His counterpart at Home Depot got the boot. Things have gotten so out of hand that companies are now reporting sales figures monthly and even weekly in order for the Wall Street traders to have something to make the stock move.

    As for Nike, Philip Knight, the founder and CEO, owns a controlling interest and can pretty much do what he wishes. This is not typical of most companies (although it is of Walmart as well).
    (From the proxy statement)

    Philip H. Knight . . . . . .Beaverton, Oregon
    Class A 109,910,094 93.5%
    Class B 109,923,764 22.3%

  8. UncleBob says:

    If a company only focuses on what Wall Street wants, then they’re not focusing on what’s best for the company. Screw Wall Street and take care of your company, both here and now and in the future.

    You’ve answered why Nike doesn’t care about Wal*Mart – what about the many, many other various companies that don’t sell at Wal*Mart?

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