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Chapter 13: Problem 16

Walmart is the world's largest retailer. As a consequence, it has sufficient bargaining power to push its suppliers to lower their prices so it can honor its slogan of "Always Low Prices" for its customers. a. Is Walmart acting like a monopolist or monopsonist when purchasing goods from suppliers? Explain. b. How does Walmart affect the consumer surplus of its customers? The producer surplus of its suppliers? c. Over time, what is likely to happen to the quality of products produced by Walmart suppliers?

Short Answer

Expert verified
Answer: When purchasing goods from suppliers, Walmart acts like a monopsonist with significant bargaining power. This leads to increased consumer surplus due to lower prices, decreased producer surplus for suppliers, and could potentially result in lower product quality over time due to suppliers cutting costs to maintain profitability.

Step by step solution

01

Part-a: Monopolist or Monopsonist

A monopolist is a firm that has a dominant position as the sole seller of a product, while a monopsonist is a firm that has significant market power as the sole buyer of a product. In this case, Walmart's role as a purchaser from suppliers with significant bargaining power suggests that it is acting like a monopsonist.
02

Part-b: Consumer Surplus and Producer Surplus

Consumer surplus is the difference between what a consumer is willing to pay for a good and the market price they actually pay. Producer surplus is the difference between the market price a producer receives for a good and the minimum price they are willing to sell it for. Walmart's practice of pushing down supplier prices to offer lower prices to consumers will likely have a positive impact on consumer surplus, as consumers spend less on the products they purchase. However, Walmart's aggressive price negotiation tactics can lead to a decrease in the producer surplus of its suppliers, as they get paid a lower price for their goods.
03

Part-c: Quality of Products over Time

Over time, the pressure Walmart puts on its suppliers to reduce prices may lead some suppliers to cut costs in order to maintain profitability. This cost-cutting could result in a lower quality of products produced by these suppliers. It is important for Walmart to monitor this carefully, as a decrease in the quality of products offered to consumers could eventually have a negative impact on its business and reputation.

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Most popular questions from this chapter

A monopolist knows that in order to expand the quantity of output it produces from 8 to 9 units it must lower the price of its output from \(\$ 2\) to $\$ 1 .$ Calculate the quantity effect and the price effect. Use these results to calculate the monopolist's marginal revenue of producing the 9 th unit. The marginal cost of producing the 9 th unit is positive. Is it a good idea for the monopolist to produce the 9 th unit?

In the United States, the Federal Trade Commission (FTC) is charged with promoting competition and challenging mergers that would likely lead to higher prices. Several years ago, Staples and Office Depot, two of the largest office supply superstores, announced their agreement to merge. a. Some critics of the merger argued that, in many parts of the country, a merger between the two companies would create a monopoly in the office supply superstore market. Based on the FTC's argument and its mission to challenge mergers that would likely lead to higher prices, do you think it allowed the merger? b. Staples and Office Depot argued that, while in some parts of the country they might create a monopoly in the office supply superstore market, the FTC should consider the larger market for all office supplies, which includes many smaller stores that sell office supplies (such as grocery stores and other retailers). In that market, Staples and Office Depot would face competition from many other, smaller stores. If the market for all office supplies is the relevant market that the FTC should consider, would it make the FTC more or less likely to allow the merger?

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