Wal-Mart as a Monopsony - Case Study Example

Wal-Mart as a Monopsony of the of the Contents Contents 2 Introduction 3 Discussion 3 Markets in real world 3 Wal-Mart: A case of Monopsony 5 Conclusion 8 References 9 Introduction Theories in economics suggest that there are four major types of market structures, namely pure monopoly, perfect competition, monopolistic competition and oligopoly. Contemporary organizations operate in any of the above mentioned market structures. The purpose of the current paper is to analyze the market structure wherein Wal-Mart operates. Wal-Mart is one of the most reputed American companies in the retail sector that operates large number of stores globally. The company was found in 1962 and was incorporated in 1969. The net sales of the company in the fiscal year 2012 were $ 443 billion. Presently, Wal-Mart operates in 26 countries across the globe offering groceries and general merchandise in its stores (Reuters, 2014). The primary mission of the company is to provide people with quality products at reasonable prices and to improve their lifestyle. The idea is to realize whether or not Wal-Mart operates in conditions of monopsony. Discussion Markets in real world Perfectly competitive markets assume that there are many buyers and sellers in the market and agents have no control over price. Additionally, the products are homogenous and firms can easily enter and exit the markets without any barriers. Examples of perfectly competitive products abound in the agricultural sector producing wheat, livestock and the market for precious metals like, gold. Shares traded by companies like, Google and CitiBank, also work under perfect competition as the number of buyers and sellers are infinite and the products are homogenous (Frumkin, 2006). Prices cannot be controlled for services provided by the government in terms of defense, electricity, gas and sanitary facilities. This type of a market structure is regarded as a monopoly because there is only one single seller, the government, which sets price of the products and prevents the entry of others. The U.S. postal service is one such national monopoly providing services to the nation and competing against private delivery system. World Intellectual Property Organization is also a technological monopoly service that protects patents of researchers. The products produced are also unique and do not have immediate substitute (OConnor, 2004). Companies like, KFC, Pizza Hut and detergent companies like, Ariel and Sunlight, are working under conditions of monopolistic competition. All these organizations face competition from remaining sellers in the market and have differentiated their products slightly, thereby facilitating price control to an extent. The market power emanates from the loyal customers who have made these brands popular. However, availability of substitute products constrains pricing decision of these firms. Barriers to entries in these markets are low as new firms can always enter and government intervention is less (Hirschey, 2008). Automobile companies like, Chrysler, General Motors and Ford, function under conditions of oligopoly. Oligopolistic market structure is characterized by a condition, where firms dominate the production in market and has the power to produce slightly differentiated products. In some cases, the products may be identical as well. The barriers to entry in this industry are quite high and existing firms can drive out new firms. The market of breakfast cereals in America is dominated by General Mills, Quaker Oats, Kellogg’s ad Kraft food, thereby representing an oligopolistic structure. The existing firms control the price and can even act in a collusive manner so as to drive the new firms out of competition (Mankiw, 2011). Wal-Mart: A case of Monopsony The case of Wal-Mart can be treated as a classic case of monopsony. A monopsony is a market structure that is characterized by a single buyer in the market. Monopsony firms control the demand side of a market where they can control the price by regulating the quality produced. If a monopsony decides to increase the quantity, then the purchase price falls automatically. A firm acting as a monopsonist has considerable power over its suppliers as the latter has no other buyers in the market. A perfect example of a monopsony is a case where the barriers to entry are high for causes quite similar to that of a monopoly like, patents and copyrights, high cost of starting up business and falling average costs (Tucker, 2010). Figure 1: Price and Output in Monopsony MFC S PC PM D QM QC (Source: Author’s creation) The above graph shows the level of price and quantity of a monopsonist. The terms Qc and Pc represents the quantity and price that is charged under the conditions of perfect competition. Qm and Pm are the price and output charged by a monopsonist. Examples of pure monopsony are rare in the market because sellers generally have alternative buyers. Wal-Mart is a retail giant that has almost acquired the status of monopsonist in the market because of the terms established with its suppliers. The huge geographical presence coupled with the robust financial market position have created immense buying power for the company, which allows for lowering the market prices and creates efficiency in the economy. Wal-Mart manipulates its suppliers in such a manner that supplies can be obtained at lower prices. This facility allows Wal-Mart to charge lower prices for the final products, allowing the poor section of the economy to purchase quality products. Retailers and manufacturers of consumers’ goods depend largely on Wal-Mart to sell their goods. In an empirical research that was conducted by Bloom and Perry (2001), it was found that suppliers who conduct business with Wal-Mart have better chances in improving market share compared to those who do not. For suppliers to continue their business with Wal-Mart, it is essential that they reduce their prices as per conditions of the retail concern (Bloom & Perry, 2001). Hence, it has been hugely debated among academicians and business houses alike that such actions by Wal-Mart reduce the level of the supplier profits. Wal-Mart does not participate in the market significantly, but micromanages the market. While doing so, the company coordinates the actions of suppliers. Research work conducted on powerful buyers has revealed that they particularly exploit small and medium level suppliers by mainly manipulating their numbers. Restricting their numbers has a direct impact on price of the commodity supplied; in cases where small suppliers do not comply with the buyer, they are forced out of business. Wal-Mart has the power to seek the cost structure of their suppliers, which allows them to drive down the purchasing price (Alter Net, 2006). The existing literature points out that monopsony power can be exerted both in the intermediate market of labor as well as in that for final products. Researchers have argued that Wal-Mart exerts considerable power on the local labor markets as well (Wyld, Pugh & Tyrrall, 2012). This approach takes a different stance on the subject and studies the monopsony power from the lens of labor markets. The research findings indicate that Wal-Mart does exert monopsony power, especially in rural areas of the U.S.A. Sub-urban areas and rural areas that are geographically separated from the mainland has been found to have greater extent of wage differential than city areas (Bonanno & Lopez, 2012). Empirical research, in this regard, has produced mixed results. The research conducted by Neumark, Zhang and Ciccarella (2008) has suggested that Wal-Mart had imposed an overall negative impact on per capita earnings of the employees, resulting in 2.7% drop in sales per store. Wal-Mart has a very important hold on the U.S. labor market and employs one out of four retail workers in the states of south and mid-west. However, the proportion of employment in the north-east and Pacific west region is lower. The degree of monopsony in labor market has been observed to be higher in regions, where Wal-Mart employs the majority of labors (Neumark, Zhang & Ciccarella, 2008). The implications of monopsony can be detrimental on both stability of the market and effectiveness of the political process. The welfare of the suppliers as well as the employees can be marginalized due to monopsonist practices. Similarly, high degrees of monopsony have the power to extort greater taxes from the society. The situation becomes worse for the developing countries where entry by retail giant Wal-Mart can seriously impact the suppliers’ prosperity by way of bargaining over the prices. This is perhaps the reason for which the entry of Wal-Mart in India has been contested. Conclusion The current market structure in the real economy is dominated by different types of scenario. Presence of perfect competition in the share markets, presence of monopoly in government services like, post and sanitary, presence of oligopoly in the automobile industry and presence of monopolistic competition in fast food chain and detergent markets are some of the practical examples found in the real world scenario. The case of monopsony is a rather different take on monopoly from point of view of the buyer. From the current case of Wal-Mart, it can be concluded that its huge geographical presence combined with high economic profits have enabled the company to gain the position of a monopsony. Wal-Mart micromanages the market and dictates price for its suppliers who have no option, but to comply and reduce their prices so as to remain in business. Wal-Mart also exerts its monopsony power on the labor market by depressing the wages at which labors are hired. Though monopsony practices reduce price of the final product sold by Wal-Mart, yet the same has the power to reduce the suppliers’ welfare by forcing them out of business. References Alter Net. (2006). The case for breaking up Wal-Mart. Retrieved from http://www.alternet.org/story/39251/the_case_for_breaking_up_wal-mart. Bloom, P. N. & Perry, V. G. (2001). Retailer power and supplier welfare: the case of Wal-Mart. Journal of Retailing, 77(3), 379-396. Bonanno, A. & Lopez, R. A. (2012). Wal-Marts monopsony power in metro and non-metro labor markets. Regional Science and Urban Economics, 42(4), 569-579. Frumkin, N. (2006). Guide to Economic Indicators. New York: M.E. Sharpe. Hirschey, M. (2008). Managerial economics. Connecticut: Cengage Learning. Mankiw, G. N. (2011). Principles of Economics. Connecticut: Cengage Learning. Neumark, D., Zhang, J. & Ciccarella, S. (2008). The effects of Wal-Mart on local labor markets. Journal of Urban Economics, 63(2), 405-430. OConnor, D. E. (2004). The basics of economics. New York: Greenwood Publishing Group. Reuters. (2014). Wal-Mart Stores Inc. Retrieved from http://in.reuters.com/finance/stocks/companyProfile?symbol=WMT.N. Tucker, I. B. (2010). Survey of Economics. Connecticut: Cengage Learning. Wyld, J., Pugh, G. & Tyrrall, D. (2012). Can powerful buyers “exploit” SME suppliers? Journal of Small Business and Enterprise Development, 19(2), 322-334. Read More