BILATERAL MONOPOLY: CHARACTERISTICS AND EXAMPLES - ECONOMY - 2024

A bilateral monopoly refers to a market structure that has a single supplier and a single buyer. The sole supplier will tend to act as a monopoly power and seek to charge the buyer the highest price. The sole buyer will seek to pay the lowest possible price.

Therefore, it is a market where there is a single buyer (monopsony) and a single seller (monopoly). Game theory is often used to analyze this type of market structure.

Source: picserver.org

Ultimately, the precise price level will be defined by non-economic factors, such as the bargaining power, skill, and other strategies of the participating companies.

In the conditions of bilateral monopoly, the economic analysis leads to an indeterminacy, which is finally resolved by exogenous factors. It is very rare to have a bilateral monopoly in the commodity market, but it is quite common in the labor market, where workers organize in a union and face a single employer, or companies organize in a trade association.

characteristics

This type of monopoly can exist as long as there is a small market that limits the number of players, or when there are multiple players, but the cost of changing buyers or suppliers is prohibitively expensive.

Balance of interests

The bilateral monopoly requires that the seller and the buyer, who have diametrically opposite interests, achieve a balance of their interests. The buyer seeks to buy low and the seller tries to sell high.

The key to a successful business for both is to achieve a balance of interests reflected in a "win-win" model.

At the same time, both the buyer and the supplier are very aware of who they are dealing with.

Market control balance

The process of balancing control of the market is part of the bilateral monopoly. In the early days of the industrial revolution, many labor markets were dominated by a single employer, or monopsony buyer.

To counteract this control of the monopsony market, the workers formed unions to become monopoly sellers.

When the two parties achieved a relative balance, the resulting salary approached that of a competitive market. While the bilateral monopoly is not perfect and efficient, it is often an improvement over the monopsons market.

The key word is "balance." If the balance tips in favor of the monopoly union, as would a powerful national union on the supply side and hundreds of small, independent employers on the purchasing side, then inefficiency reappears.

High bargaining power

A company that has high bargaining power with its clients can be considered as a bilateral monopoly, which would make the company considered a monopoly, and also high bargaining power with its suppliers, which would mean that the company is also a monopsony..

Since both parties have conflicting objectives, the supplier and the buyer must negotiate based on the bargaining power relative to each of them. The final price will be established between the points of maximum profit that the two parties have.

However, when the bargaining power is similar between both parties, there may be a joint maximization of profits.

This can be achieved through a pact, or even vertical integration can occur if the two companies merge, which would cause both firms to obtain a balance such as that of perfect competition.

Efficiency

The bilateral monopoly does not achieve an efficient allocation of resources like that found with perfect competition. However, you can achieve a more efficient allocation than that of the buyer of a monopsony or that of a monopoly seller alone.

Although both monopsony and monopoly act unilaterally, they tend to be extremely inefficient. When combined, efficiency improves.

The reason is that the monopsony buyer's market control is counteracted by the monopoly seller's control of the market. This is how a competitive market achieves efficiency.

The difference is that perfect competition has a large number of competitors on both sides, instead of just one.

Examples

Standard Oil

It can be considered as an example Standard Oil, in the days before its rupture. In 1911, the United States Supreme Court ruled that the company was an illegal monopoly.

However, Standard Oil could also be viewed as a monopsony. As the largest oil corporation in the US, it had incredible power to negotiate prices with its suppliers when purchasing parts for its refining factories.

Single employer versus union

A common type of bilateral monopoly occurs in a situation where there is only one large employer in an industrial city, in which its demand for labor is the only important one in the city, and the supply of labor is handled by a well-organized and strong staff., which is the union.

It is a labor market with a union on the supply side and a monopsony on the demand side.

As both parties have monopoly power, the equilibrium level of employment will be lower than that of a competitive labor market, but the equilibrium wage could be higher or lower depending on which side negotiates better.

The union favors a higher salary, while monopsony favors a lower salary, but the result is indeterminate in the model.

Negotiations on wages and working conditions between large corporations and unions, such as those between General Motors and the Single Union of Auto Workers, closely approximate the bilateral monopoly model.

Nuclear aircraft carrier

In the United States, there is a very peculiar example in the market for nuclear-powered aircraft carriers.

The United States Navy is the only buyer requiring the product, and by stipulation of regulations promulgated by the buyer's parent organization, which is the Department of Defense, there is only one supplier: Huntington Ingalls Industries

So far no other company has been licensed to manufacture, overhaul or dismantle nuclear powered aircraft carriers.

Fossil coal mine

A prominent example is a fossil coal mine and a fossil coal-based power plant. Since it is not economical to transport this lignite, the power plant is frequently located near the mine.

The mine is monopolistic in the production of fossil coal, and as the sole buyer the power plant acts as a monopsony.

References

1. Will Kenton (2019). Bilateral Monopoly. Taken from: investopedia.com.
2. Policonomics (2019). Bilateral monopoly. Taken from: policonomics.com.
3. Wikipedia, the free encyclopedia. Bilateral monopoly. Taken from: en.wikipedia.org.
4. Shuani (2019). Bilateral Monopoly. Your Article Library. Taken from: yourarticlelibrary.com.
5. Amos Web (2019). Bilateral Monopoly. Taken from: amosweb.com.