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the negative farm price effect of a monopsony in the processing of a farm product could...

the negative farm price effect of a monopsony in the processing of a farm product could be prevented if farmers sold their product to the monopsony processor through a marketing board that would auction the total available supply each year. T/F. Why?

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Answer #1

If the number of bidders in the market are diverse in their preferences for the product and their purchasing power, the revenues can be increased through selling the farm produce through an auction which will auction the total available supply each year. According the model by Bulow and Klemperer, the revenue from an auction is always higher than through the direct contract with a single buyer. If the costs of conducting an auction is not considerably higher than the cost of creating a contract in a monopsony situation, the sale of the produce through an auction could increase profits. Since, the revenue is greater through an auction, the price depression effect of a monopsony is prevented by selling the farm produce through an auction. Therefore, the statement is true.

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