Bilateral Monopoly

Definition

A bilateral monopoly is a market structure in which there is a single seller (monopolist) and a single buyer (monopsonist). In this situation, both the monopolist and the monopsonist have significant market power and must negotiate the terms of the transaction, such as the price and quantity exchanged.

5 Must Know Facts For Your Next Test

1. In a bilateral monopoly, the monopolist and the monopsonist must negotiate the terms of the transaction, as they both have significant market power.
2. The outcome of a bilateral monopoly is determined by the relative bargaining power of the monopolist and the monopsonist, as well as their respective objectives and constraints.
3. The equilibrium price and quantity in a bilateral monopoly are generally higher than the competitive market outcome, but lower than the monopoly or monopsony outcome.
4. Bilateral monopolies can lead to inefficient outcomes, as the monopolist and the monopsonist may not reach the socially optimal level of production and exchange.
5. The presence of a bilateral monopoly can create incentives for the monopolist and the monopsonist to engage in strategic behavior, such as price discrimination or vertical integration, to improve their respective positions.

Review Questions

• Explain the key features of a bilateral monopoly and how it differs from a traditional monopoly or monopsony.
  • In a bilateral monopoly, there is a single seller (monopolist) and a single buyer (monopsonist), both of whom have significant market power. This is in contrast to a traditional monopoly, where there is a single seller with no buyers, or a monopsony, where there is a single buyer and multiple sellers. The key feature of a bilateral monopoly is that the monopolist and the monopsonist must negotiate the terms of the transaction, such as the price and quantity, rather than one party dictating the terms. The outcome of a bilateral monopoly is determined by the relative bargaining power of the two parties and their respective objectives and constraints.
• Analyze the potential inefficiencies that can arise in a bilateral monopoly and discuss strategies the monopolist and monopsonist might use to improve their respective positions.
  • Bilateral monopolies can lead to inefficient outcomes, as the monopolist and the monopsonist may not reach the socially optimal level of production and exchange. This is because both parties are trying to maximize their own profits, which may not align with the overall welfare of society. To improve their respective positions, the monopolist and the monopsonist may engage in strategic behavior, such as price discrimination or vertical integration. For example, the monopolist may try to segment the market and charge different prices to different buyers, while the monopsonist may try to integrate backwards and become the sole supplier of the input, thereby reducing the monopolist's bargaining power. These strategies can further distort the market and lead to even greater inefficiencies.
• Evaluate the role of the Nash equilibrium in a bilateral monopoly and explain how it can help us understand the outcome of the negotiation between the monopolist and the monopsonist.
  • The concept of the Nash equilibrium is important in understanding the outcome of a bilateral monopoly. The Nash equilibrium is a situation in which both the monopolist and the monopsonist have chosen their optimal strategies, and neither has an incentive to change their behavior unilaterally. In a bilateral monopoly, the monopolist and the monopsonist must negotiate the terms of the transaction, and the Nash equilibrium represents the point at which neither party has an incentive to deviate from the agreed-upon price and quantity. The Nash equilibrium can help us understand the bargaining power of the two parties and the factors that influence the final outcome, such as their respective objectives, constraints, and the relative scarcity of the good or service being traded.

Related terms

Monopoly:

A market structure in which a single seller (the monopolist) controls the entire supply of a good or service, with no close substitutes available.

Monopsony:

A market structure in which there is a single buyer (the monopsonist) who has the power to dictate the terms of the transaction, such as the price and quantity.

Nash Equilibrium:

A situation in which both the monopolist and the monopsonist have chosen their optimal strategies, and neither has an incentive to change their behavior unilaterally.