Bilateral Monopoly

Definition

A bilateral monopoly is a market structure in which there is a single buyer (monopsony) and a single seller (monopoly) of a particular good or service. In this scenario, the buyer and the seller must negotiate the terms of the transaction, including the price and quantity, as they both have significant market power.

5 Must Know Facts For Your Next Test

1. In a bilateral monopoly, the buyer and the seller must engage in negotiation to determine the final price and quantity traded, as both parties have significant market power.
2. The outcome of a bilateral monopoly is generally less efficient than a perfectly competitive market, as the negotiated price and quantity are typically higher than the competitive level.
3. The relative bargaining power of the buyer and the seller in a bilateral monopoly can significantly influence the final outcome, with the party with more bargaining power able to secure a more favorable deal.
4. Bilateral monopolies are often observed in labor markets, where a single employer (monopsony) negotiates with a single labor union (monopoly) to determine wages and employment levels.
5. The presence of a bilateral monopoly can lead to deadweight loss, as the negotiated price and quantity may not align with the socially optimal level.

Review Questions

• Explain how the concept of bargaining power affects the outcome of a bilateral monopoly.
  • In a bilateral monopoly, the relative bargaining power of the buyer and the seller is a crucial factor in determining the final price and quantity traded. The party with more bargaining power, which could be influenced by factors such as the availability of alternative options, the importance of the good or service, and the relative size and resources of the participants, will be able to secure a more favorable deal. For example, if the buyer has more bargaining power, they may be able to negotiate a lower price and higher quantity, while the seller with more bargaining power can demand a higher price and limit the quantity traded.
• Analyze how the presence of a bilateral monopoly can lead to a less efficient market outcome compared to a perfectly competitive market.
  • In a perfectly competitive market, the equilibrium price and quantity are determined by the intersection of supply and demand, which leads to the most efficient allocation of resources. However, in a bilateral monopoly, the buyer and the seller must negotiate the terms of the transaction, and the final outcome is typically less efficient. This is because the negotiated price and quantity are often higher than the competitive level, leading to a deadweight loss. The negotiated price may be higher than the marginal cost of production, and the quantity traded may be lower than the socially optimal level, resulting in a loss of potential surplus for both the buyer and the seller, as well as for society as a whole.
• Evaluate the role of bilateral monopolies in labor markets and their potential impact on wages and employment levels.
  • Bilateral monopolies are often observed in labor markets, where a single employer (monopsony) negotiates with a single labor union (monopoly) to determine wages and employment levels. In this scenario, the relative bargaining power of the employer and the union can significantly influence the outcome. If the employer has more bargaining power, they may be able to negotiate lower wages and higher employment levels, while the union with more bargaining power can demand higher wages and limit employment. However, the presence of a bilateral monopoly in the labor market can lead to a suboptimal outcome, as the negotiated wages and employment levels may not align with the socially optimal level. This can result in a loss of potential surplus for both the employer and the employees, as well as for the broader economy, due to the inefficient allocation of labor resources.

Related terms

Monopsony: A market structure in which there is a single buyer of a particular good or service, giving the buyer significant market power to influence the price and quantity traded.

Monopoly: A market structure in which a single seller of a particular good or service has significant market power to influence the price and quantity traded.

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