Bilateral monopoly

3 key takeaways

• A bilateral monopoly involves a single supplier and a single buyer, leading to unique dynamics in pricing and negotiation.
• The power balance between the buyer and seller can significantly influence the market outcomes and pricing strategies.
• This market structure is rare and often involves strategic negotiations to reach mutually beneficial agreements.

What is a bilateral monopoly?

A bilateral monopoly is a unique market structure characterized by the presence of a single seller (monopoly) and a single buyer (monopsony). This situation creates a distinct set of dynamics because both parties have significant market power. The monopolist controls the supply of a good or service, while the monopsonist controls the demand. As a result, the interaction between these two entities involves complex negotiations to determine the price and quantity of the good or service exchanged.

In a bilateral monopoly, the monopolist aims to maximize profits by setting a high price, while the monopsonist seeks to minimize costs by pushing for a lower price. The final outcome depends on the relative bargaining power of each party and their ability to negotiate effectively.

Key aspects of a bilateral monopoly

• Market Power: Both the monopolist and the monopsonist wield significant power in the market, leading to strategic negotiations over price and quantity.
• Negotiation Dynamics: The outcome in a bilateral monopoly is heavily influenced by the negotiation skills and strategies of the buyer and seller. Each party aims to leverage its position to achieve favorable terms.
• Price Determination: Unlike in competitive markets where prices are determined by supply and demand, prices in a bilateral monopoly are determined through bargaining between the monopolist and monopsonist.
• Mutual Dependence: The monopolist and monopsonist are mutually dependent on each other, as the seller has no alternative buyers and the buyer has no alternative sellers. This interdependence shapes their interactions and agreements.

Real world application

Bilateral monopolies are rare in practice but can occur in specific industries or situations. One common example is in labor markets where a single employer (monopsonist) negotiates with a single labor union (monopolist). Here, the employer controls the demand for labor, and the union controls the supply of labor. The wage rate and employment terms are determined through collective bargaining between the two parties.

Another example can be found in certain agricultural markets where a single processing company (monopsonist) buys crops from a single large farm (monopolist). The price and quantity of the crops are negotiated between the farm and the processing company.