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Home > Economics FAQs Blogs > What is a 'bilateral monopoly'?

What is a 'bilateral monopoly'?

Relevant Topics

This question pertains to topics in Microeconomics, such as Market Structures, Monopoly, and Monopsony

Definitions:

Monopoly: A market structure characterised by a single seller, selling a unique product with no close substitutes.

Monopsony
: A market condition in which there is only one buyer.

Bilateral Monopoly:
A market situation where there is a single buyer (a monopsony) and a single seller (a monopoly).

Detailed Explanation:

A bilateral monopoly is a market structure where a monopoly producer (a single seller) faces a monopsony buyer (a single buyer). This situation often leads to negotiations between the buyer and seller regarding the price of the product or service, with each party having significant market power.

The resulting price and quantity from such negotiations depend on the relative bargaining power of both the seller and the buyer. If the seller has more bargaining power, the outcome will be closer to the monopoly outcome (higher price and lower quantity). Conversely, if the buyer has more bargaining power, the result will be closer to the monopsony outcome (lower price and higher quantity).

Recent: 

Defence procurement: A government (the monopsony buyer) often contracts a single defence contractor (the monopoly provider) to produce specialised military equipment. In this case, the price of the military equipment is not determined by traditional market forces but through negotiations between the government and the defence contractor.

Labour Markets:
In some instances, a labour market may form a bilateral monopoly. For example, a specific skilled worker (the monopoly supplier of labour) could be critical to a firm's operations (the monopsony buyer of labour). The wage and working conditions would then be negotiated between the worker and the firm.

Summary:

A bilateral monopoly, a market structure with one seller (a monopoly) and one buyer (a monopsony), often leads to a negotiation over price between these two parties. The final price and quantity produced depend on their relative bargaining power. Examples of bilateral monopolies can be seen in defence procurement and specific labour market situations.

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