ECO511: MICROECONOMICS I

ASSIGNMENT-1
BILATERAL MONOPOLY

Submitted by
Bhavana Babu R.S.
Roll no: 09
I MA Economics
University of Kerala
Kariavattom Campus
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CONTENTS
Page no:
INTRODUCTION
HISTORY OF BILATERAL
MONOPOLY
PRICE AND OUTPUT
DETERMINATION UNDER
BILATERAL MONOPOLY
CONCLUSION
REFERENCE

3-4
5
6-9

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INTRODUCTION
MONOPOLY
Monopoly is a market situation where there is only one seller of
a product with no close substitutes.
Under the monopoly, the firm and industry are the same since
there is only a single firm.
The monopoly demand curve is negatively sloped. The negative
slope shows that the monopolist can either fix the quantity or
price, not the both . If he wants to sell more quantity, he has to
reduce price and if he want to sell at a high price he has to
reduce the quantity.
Entry is prevented in the bilateral monopoly so the monopolist
can earn extra profits in the long run.
Monopolys MR Curve

Since the monopolys demand curve is negatively sloped

its marginal revenue (MR) is lower than average revenue
(AR) or Price. This is due to the fact that to sell
additional quantity, MR must fall so that price of previous
quantity sold will also fall.
The MR curve of the monopolist has twice as slope of the
AR curve or demand curve or price, that is if the slope of
AR curve = -B, then the slope of MR curve =-2B.
That is MR is a straight line with same intercept as the
demand curve, but twice as steep.

BILATERAL MONOPOLY

Bilateral monopoly is a market structure consisting of a

single seller (monopolist) and single buyer
(monopsonist).
For example if there is only a single firm that is
producing all the copper in a country and if only one
firm used this metal, the copper market would be a
bilateral monopoly.

Assumptions
1) There is only a single commodity with no close
substituites.
2) The monopolist is its sole producer or seller.
3) The monopsonist is its only buyer.
4) The monopolist and the monopsonist are both free to
maximise their own individual profits.

HISTORY OF BILATERAL MONOPOLY

The bilateral monopoly was developed in the late 1800s and
late 1900s in order to explain the assorted labour markets operating in
the early days of the US industrial revolution. During this period large
industrial activities (factories, mines, lumber operations) commonly
created monopsony markets by dominating the labour market of a
given community. This resulted in expected monopsony outcome
especially low wages. The workers sought to counter these less than
desirable situations, by forming labour unions.
The expressed goal of most unions was to monopolize the
selling side of a labour market and balance the monopsony power of
the employer .This resulted in a bilateral monopoly.

PRICE AND OUTPUT DETERMINATION

UNDER BILATERAL MONOPLY
The equilibrium of a bilateral monopoly market cannot be
determined by traditional tools of demand and supply. Economic
analysis can only define the range within which the price will
eventually be settled. The precise level of the price( and output ) ,
however will ultimately be defined by non -economic factors such as
bargaining power ,skill and other strategies of the participant firms .
The bilateral monopoly model can be used to analyse many
types of market like commodity market , factor market etc .But it is
most relevant for factor market ,especially those for labour services
.Let us consider both the cases one by one , first we can look into
bilateral monopoly in a commodity market.

BILATERAL MONOPOLY COMMODITY MARKET

To illustrate the situation of a bilateral monopoly in a
commodity market, assume that all railway equipment of a country is
produced by a single firm and is bought by a single buyer, British
Rail. Both firms are assumed to aim at maximisation of their profit.
The equilibrium of the producer monopolist is defined by the
intersection of his MR and MC curves at the point e1, shown in
figure. He would maximise his profit if he were to produce X1
quantity of commodity and sell it at the price P1. The figure given
below shows the bilateral monopoly in a commodity market.
ME
P
C
MC

e
P1

b
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P*
D
P2

X2

e1

X1

X
M*

The producer cannot obtain the above profit maximising

level because he is selling it to a single buyer who can obviously
affect the market price by his purchasing decisions. The buyer is
aware of his power, and being a profit maximizer, he would like to
impose his own price terms to the producer.
The monopsonists price terms are:The MC curve of the producer represents the supply curve of the
buyer: the upward slope of this curve shows that as the monopsonist
increases his purchases the price he will have to pay rises .The MC
(=S) curve is determined by the conditions outside the control of the
buyer and it shows the quantity that the monopolist seller is willing to
supply at various prices. The increase in expenditure of the buyer
(marginal expenditure) caused by the increase in his purchases is
shown by the curve ME in the figure.
ME is the marginal cost of equipment for the
monopsonist. The equipment is an input for the buyer, thus in order to
maximise his profit he would like to purchase additional units of X
until his Marginal Expenditure = Price as determined by the demand
curve DD. The monopsonists equilibrium is shown by point e: he
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would like to purchase X2 units of equipments at price P2,

determined by point a on the supply curve MC (= S).
Here the buyer wants to pay P2 price while the seller
wants to charge a price P1, there arise an indeterminancy in the
market. The two firms will sooner or later start negotiations and will
eventually reach an agreement about price , which will be settled
somewhere in the range between P1 and P2 ,(P2 P P1 ) ,depending
upon the bargaining skill and power of the firms .
In the case of a bilateral monopoly that emerges in a commodity
market, the buyer may attempt to buy-out the seller monopolist ,thus
attaining vertical integration of his production . The consequences
are: The supply curve MC (= S) becomes the MC curve of the
monopsonist, and hence his equilibrium will be defined by
point b (where new MC curve intersects the price-demand
curve DD): output will increase to the level X* and MC will
be P*, lower than price P1, that the ex-monopolist would like
to charge.
The result of the vertical integration in these conditions is an
increase in the production of the input, which will lead to an
increase in the final product of the ex-monopsonist and a
reduction in his price, given that he is faced by a downward
sloping demand curve.

BILATERAL MONOPOLY LABOUR MARKET

W

MCL
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S= AC

W3
W1
W2
D=MRP
Q2

Q1

QL

In the figure in the x axis we have the quantity of labour employed

(QL) and on y axis wage (W). Here, the monopsony (industry) would
pay a wage of W2 and employ Q2 workers where Marginal Revenue
Product (MRP) = Marginal Cost (MC). The trade union would
organise labour and bargain for higher wages W3 without causing a
fall in employment.

CONCLUSION
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The model of a bilateral monopoly does not tell us the

wage that will emerge in a labour market as well as price in a
commodity market .Whether the final price or wage will closer to the
union (buyer) and employer (seller) depends on the bargaining power
of both and also other strategies of the firms in case of a commodity
market. Also another important thing in case of bilateral monopoly is
that it can achieve a more efficient allocation of resources than that of
either a monopsony buyer by itself or a seller by itself monopoly
seller by itself. The reason is that the market control of the
monopsony buyer is countered by the market control of the monopoly
seller. But it does not achieve an efficient allocation of resources like
that found with perfect competition.

REFERENCE

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1) A. Koutsoyiannis Modern Microeconomics-Macmillan Press

LTD-Second edition
2) http://www.economicshelp.org
3) http://www.amosweb.com
4) http://lumeninstructure.com

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