Bilateral monopoly

A market characterized by a single seller and a single buyer, otherwise known as a monopoly and a monopsony.

Examples of a bilateral monopoly frequently occur in the public sector where a government education employer negotiates with a single teachers’ union on pay and conditions.

Bilateral monopoly situations are typically analyzed using the theory of Nash bargaining games, and market price and output will be determined by forces like bargaining power of both buyer and seller, with a final price settling in between the two sides’ points of maximum profit.A bilateral monopoly model is often used in situations where the switching costs of both sides are prohibitively high.

  • One example occurs when a labor union (a monopolist in the supply of labor) faces a single large employer in a factory town (a monopsonist).
  • A peculiar example exists in the market for nuclear-powered aircraft carriers in the United States, where the buyer (the United States Navy) is the only one demanding the product, and there is only one seller (Huntington Ingalls Industries) by stipulation of the regulations promulgated by the buyer’s parent organization (the United States Department of Defense, which has thus far not licensed any other firm to manufacture, overhaul, or decommission nuclear-powered aircraft carriers).
  • A typical or showpiece example of bilateral monopoly is a lignite (brown coal) mine and a lignite based power station. Since transport of lignite is not economical, the power station is located close to the mine. The mine is monopolistic in producing lignite, and as the only buyer the power station acts as a monopsony.

Depending on which side has greater negotiation power there can be different outcomes that resemble more or less its two extreme possibilities, as shown in the adjacent figure. The obvious and antagonistic scenarios that can result in this market are monopsony and monopoly. When the demand side holds all the negotiation power we will be dealing with a monopsony-like situation such as m, where price Pm is lower than the monopolist price (PM) and the price of a perfectly competitive market (PPC). When negotiation power is held by the supply side, the monopolistic firm will sell less quantity (QM) than the monopsonist would buy if it had more power (Qm). However, when the bargain power is equally shared between the two sides there may be joint profit maximisation, which can be done by colluding, or even vertical integration may occur if both firms merge, which would get both firms to jointly get an equilibrium corresponding to perfect competition (C). A bilateral monopoly, however, will have worse results for both firms. The quantity sold will be very low (QBC) at a rather low price (PBC).

A bilateral monopoly can also be considered as a firm that has high negotiation power with its clients, which would get the firm to be considered as a monopoly, and high negotiation powers with its suppliers, which would mean the firm is also a monopsony. Consider as an example Standard Oil, back in the days before its breakup. In 1911, the United States Supreme Court ruled that the company was an illegal monopoly. However, Standard Oil could also be considered as a monopsony: being the biggest oil corporation in the US, it had incredible power when negotiating prices with its suppliers when acquiring parts for its refining factories.

Also see: duopoly theory, monopolistic competition, monopoly

2 thoughts on “Bilateral monopoly

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