Bilateral Monopoly

Definition

A bilateral monopoly is a market structure where there is a single buyer (monopsony) and a single seller (monopoly) of a particular good or service. In this scenario, the buyer and seller have significant market power and must negotiate the terms of the transaction, such as price and quantity, to reach an agreement.

5 Must Know Facts For Your Next Test

1. In a bilateral monopoly, the buyer and seller must negotiate the terms of the transaction to reach an equilibrium, as neither party has the ability to unilaterally set the price or quantity.
2. The outcome of the negotiation between the monopoly and monopsony depends on their relative bargaining power, which is influenced by factors such as the availability of alternative buyers or sellers and the elasticity of demand and supply.
3. The equilibrium price and quantity in a bilateral monopoly are typically higher than the competitive market outcome, but lower than the price and quantity that would be set by a monopoly or monopsony acting alone.
4. Bilateral monopolies are often observed in labor markets, where a single employer (monopsony) negotiates with a labor union (monopoly) to determine wages and working conditions.
5. The inefficiency of a bilateral monopoly, compared to a competitive market, is known as the 'bilateral monopoly deadweight loss,' which represents the welfare loss to society.

Review Questions

• Explain how the bargaining power of the monopoly and monopsony in a bilateral monopoly affects the negotiated price and quantity.
  • In a bilateral monopoly, the bargaining power of the monopoly and monopsony determines the final price and quantity agreed upon. If the monopoly has greater bargaining power, it can negotiate a higher price and lower quantity, while if the monopsony has greater bargaining power, it can negotiate a lower price and higher quantity. The relative bargaining power of the two parties depends on factors such as the availability of alternative buyers or sellers and the elasticity of demand and supply.
• Describe the welfare implications of a bilateral monopoly compared to a competitive market.
  • Compared to a competitive market, a bilateral monopoly results in a higher price and lower quantity, leading to a deadweight loss. This deadweight loss represents the welfare loss to society, as some consumers who would have been willing to pay the competitive price are priced out of the market, and some producers who would have been willing to sell at the competitive price are unable to do so. The magnitude of the deadweight loss depends on the relative bargaining power of the monopoly and monopsony, as well as the elasticity of demand and supply.
• Analyze how the presence of a labor union (monopoly) negotiating with a single employer (monopsony) can be considered an example of a bilateral monopoly.
  • In the labor market, a labor union (monopoly) negotiating with a single employer (monopsony) is an example of a bilateral monopoly. The union, as the sole supplier of labor, has significant market power, while the employer, as the sole buyer of labor, also has significant market power. The outcome of the negotiation between the union and the employer, in terms of wages and working conditions, depends on their relative bargaining power, which is influenced by factors such as the availability of alternative employment opportunities and the elasticity of labor supply and demand. This bilateral monopoly scenario in the labor market can lead to a higher negotiated wage compared to a competitive market, but lower than the wage that would be set by a pure monopoly or monopsony.

Related terms

Monopsony: A market structure where there is a single buyer of a particular good or service, giving the buyer significant market power.

Monopoly: A market structure where there is a single seller of a particular good or service, giving the seller significant market power.

Bargaining Power: The ability of a party in a negotiation to influence the terms of the transaction, such as price and quantity, due to their market power.