In the personal computer market, some large manufacturers are able to buy computer components (e.g., disk drives, memory chips) at lower prices than smaller firms in the market. This outcome indicates that the large firms have

Question

In the personal computer market, some large manufacturers are able to buy computer components (e.g., disk drives, memory chips) at lower prices than smaller firms in the market.  This outcome indicates that the large firms have

BlackTom AI · Accepted Answer

Question restatement: The prompt asks about why some large computer manufacturers can purchase components like disk drives and memory chips at lower prices than smaller firms, and asks what this outcome indicates.

Option analysis:
- Correct or given option: 'a degree of monopsony power.' This is the idea that a single large buyer (or a small number of buyers) can influence the market price of inputs by virtue of its substantial purchasing power. In input markets, monopsony power allows the buyer to push prices down below what a competitive market would set because sellers have limited alternative buyers. When a few large firms dominate purchasing, they can negotiate better terms, bulk discounts, and preferred supplier arrangements, which is consistent with observed outcomes described in the question.

- Why the other potential options (if they existed) would be incorrect: Although not provided here, typical distractors might include claims like 'marginal cost pricing' or 'perfect competition in input markets' or 'oligopoly in output markets implies higher costs for buyers.' These would be inaccurate in this context because the phenomenon described relies on the buyer’s market power to reduce input prices, which contradicts assumptions of perfect competition among input suppliers or the notion that all buyers face the same input prices. The key distinction is that the purchasing firm’s relative size compared to input suppliers creates the leverage needed to secure lower prices, which is the hallmark of monopsony.

In summary, the described ability of large manufacturers to obtain components at lower prices aligns with the concept of monopsony power, where a dominant buyer can influence the terms of purchase in an input market due to its purchasing concentration. The core misconception to avoid is attributing the lower input prices to factors like universal cost reductions or symmetric competition among buyers; instead, it is the buyer-side market power that drives the effect.

ECON 4001.01 SP2025 (19496) Week 10 quiz

In the personal computer market, some large manufacturers are able to buy computer components (e.g., disk drives, memory chips) at lower prices than smaller firms in the market. This outcome indicates that the large firms have

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