Tesco, the UK’s largest supermarket chain, has reached out to their suppliers and asked them to ‘kindly’ reduce the price of their products.
In an attempt to reduce their costs and compete with low price supermarkets, Tesco is hoping that their suppliers will comply with the request as they all rely so heavily on the supermarket’s demand.
This unusual situation serves to highlight the extent of the monopsony power that Tesco has in the market for groceries and household goods.
A monopso-what-what? OK, backtrack… a monopsony is an economic term which refers to a market where there is one dominant buyer. This is in contrast to the term monopoly where there is one dominant seller.
In this situation, Tesco is such a behemoth in the supermarket sector, that many suppliers of household goods rely almost entirely on selling to them. For this reason, a business with monopsony power like Tesco, is able to use this relationship to their advantage by influencing the price they pay.
Tesco has given their suppliers a deadline of July 10th to agree to the price cuts. What will happen if they don’t? No-one really knows, but Tesco could stop buying from them which could put the suppliers in a lot of financial difficulty.
THINK LIKE AN ECONOMIST!
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