Question: Evaluate the effects of McDonald’s becoming a monopsony in the market for beef.
A monopsony is the largest (or only) buyer in a market.
If McDonald’s became a monopsony in the beef market then it will force beef suppliers to charge them a low price. If beef suppliers do not accept the low price then they cannot sell enough beef to remain in business because the monopsony is the largest buyer. Because beef suppliers cannot profitably supply a lot of beef at a low price, McDonald’s buys a lower quantity of its beef suppliers’ output.
McDonald’s maximises profits by minimising its costs. McDonald’s buys less beef but it pays less for each unit of beef, so its marginal cost curve shifts down, costs fall and profit rises. However, the beef suppliers receive a lower price and sell less, so beef suppliers’ profits fall. Maybe beef prices fall so low that some beef suppliers are forced out of the market because it is not profitable for them to produce anymore.
McDonald’s may pass on their lower beef costs in the form of lower prices to their consumers, so consumer surplus rises. Consumers could buy Big Macs for cheaper prices, raising their welfare. But, there is no guarantee that McDonald’s will lower the price of their beef burgers because, after all, they are profit maximisers and want to charge as high a price as possible.
Another effect is that McDonald’s supply is likely to fall because they buys less beef from their suppliers. This means McDonald’s cannot produce as much, so consumers cannot buy that many Big Macs and their welfare falls. However, the extent of the fall in supply depends upon what affects McDonald’s’ supply more: less beef or lower costs. If lower costs allow McDonald’s to produce a lot more, and less beef does not really harm their production, then supply will actually rise.