Bilateral Monopoly Market Structure

A bilateral monopoly is a market structure where the participants are two monopolies, i.e. one on the demand side and one on the supply side. It arises when a monopolist (single seller) faces a monopsonist (single buyer).

Here both buyers are sellers are in a bargaining position, so it is very difficult to predict what the price and output will be. Here we are assuming that firms are organized in such a way that it acts like a monopsony and labour is organized in a labour union that acts like a monopolist.

We know that there is no supply curve for a monopoly. It implies that there is no unique relationship between price and quantity supplied. A monopolist is maximizing its profit by selecting a point on his buyer’s demand function. On the other hand, there is no input-demand function for monopsonists. A monopsonist maximizes its profit by selecting a point on its seller’s supply function.

In bilateral monopoly, monopsony power and monopoly power counteract each other. The monopoly power of sellers will reduce the effective monopsony power of buyers and vice versa.

The monopolist cannot exploit a demand function that does not exist, and the monopsonist cannot exploit the input demand function that does not exist.

The three possible solutions under bilateral monopoly are:

1. The monopsonist and monopolist may cooperate with each other and achieve a Nash equilibrium solution.
2. A monopolist may dominate and force the monopsonist to accept his price and output decisions or vice versa.
3. The market mechanism may break down such that no trade takes place at all.

Figure: The equilibrium under bilateral monopoly equilibrium is indeterminate. The bilateral monopoly model gives only the upper limit and the mower limit within which the wage rate lies.

Let us explain the case of bilateral monopoly with the help of a diagram. In the figure, the output is measured on the horizontal axis, and price and cost are measured on the vertical axis. DDb is the demand curve faced but the monopsonist’s (single buyer), which is based upon his marginal utility curve.

As there exists a single buyer of the product in the market, his demand curve DDb would be the average revenue curve of the monopolist. Thus, we denote DDb curve as the ARs i.e. the average revenue of the seller. MR is the marginal revenue curve faced by the monopolist corresponding to the demand curve DDb.

The supply curve of labour faced by the monopsonist is upward-sloping. It is shown by curve SL. This supply curve is nothing but the average expenditure curve faced by the monopsonist. The corresponding marginal expenditure curve is MEb, and it would lie above AEb because average expenditure rises as he obtains more quantity of the product.

Suppose, in the first case monopsonist assumes that he has the full market power to set the price and output so as to maximize profit. He will equate marginal expenditure to the marginal value indicated by the demand curve DDb. The monopsonist equilibrium would occur at point E1 where the marginal expenditure curve MEb intersects the demand curve DDb. The monopsonist equilibrium price is Ow1, and the equilibrium quantity is OL1. The monopsonist is maximising his profit by optimally purchasing OL1 at Ow1 price.

On the other hand, suppose the monopolist assumes that he has the full market power to set the price and output so as to maximize profit. In order to maximize profit, the monopolist would equate marginal revenue with marginal cost.

The monopolist is in equilibrium at point E2 where marginal revenue is equal to marginal cost. The monopolist equilibrium price is Ow2, and the equilibrium quantity is OL2. The monopolist is purchasing the most profitable quantity OL2 at Ow2 price. We can see from the figure that the price which the monopolist wants to set is higher than the price which the monopolist wants to set, i.e. Ow2>Ow1.

It is clear that when both monopolists and monopsonists assume to be the sole price maker and act autonomously, then the ultimate result is different prices as well as different quantities. The bilateral monopoly model gives only the upper limit and the mower limit within which the wage rate lies.

The wage rate will then be determined by the bargaining. The outcome derived from bargaining is not known with certainty. The upper limit here would be Ow2, i.e. the price that monopolists wish to set, and the lower limit would be Ow1, i.e. the price that monopsonists wish to set. The price can end up anywhere between these two limits, i.e. Ow2 and Ow1. So, we can say that the solution to a bilateral monopoly is indeterminate.

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