Bilateral monopoly

Bilateral monopoly is a market structure when there is one buyer and one seller of a good or service. The two parties involved in this type of market structure have significant power to determine the prices and output of the good or service. This market structure is a form of monopoly, as the two parties involved can influence the market conditions and prices to their advantage, often resulting in higher prices and reduced output. This can lead to a decrease in consumer welfare, as the prices for the good or service are higher than in more competitive market structures.

The two parties involved in a bilateral monopoly can also reduce the amount of competition in the market by forming exclusive agreements or colluding to restrict the entry of other firms into the market. This can further reduce consumer welfare, as there is less competition to drive down prices and increase supply.

The pricing strategies of a bilateral monopoly can also be affected by the bargaining power of the two parties involved. If one party has more bargaining power than the other, they can influence the price of the good or service to their advantage, resulting in higher prices for the good or service.

Overall, bilateral monopoly is a market structure where two parties have the power to influence the prices and output of a good or service. This market structure can lead to higher prices and decreased output, as well as reduced competition and consumer welfare.

Example of Bilateral monopoly

A common example of a bilateral monopoly is the relationship between an airline and an airport. In this situation, the airline and the airport are the two parties involved in the monopoly. The airline has the power to set the prices of flights, while the airport has the power to set the fees that the airline pays to use the airport. The bargaining power of the two parties can have an effect on the pricing of flights and the fees that the airline pays to use the airport.

In addition, the two parties can also form exclusive agreements or collude to restrict the entry of other airlines into the market. This can lead to higher prices for flights and can reduce competition and consumer welfare.

Overall, the airline-airport relationship is an example of a bilateral monopoly, where two parties have significant power to influence the prices of flights and the fees that the airline pays to use the airport. This market structure can lead to higher prices for flights and reduced competition and consumer welfare.

Formula of Bilateral monopoly

The pricing strategies used by the two parties involved in a bilateral monopoly are determined by their relative bargaining power and the demand and supply curves of the good or service. The pricing strategies used by the two parties can be represented by the following formula:

$Price=\${\frac {b\cdot c}{a+b}}$

Where:

a = the demand elasticity of the good or service

b = the bargaining power of the buyer

c = the bargaining power of the seller

When to use Bilateral monopoly

Bilateral monopoly can be used in certain situations where the two parties involved have a high degree of control over the market and can influence the prices and output of the good or service. Examples of situations where bilateral monopoly can be used include:

• Natural monopolies: In a natural monopoly, the two parties involved have a high degree of control over the market. For example, in the case of a natural gas utility, the two parties involved may have a monopoly over the supply of natural gas in the area, allowing them to set the prices and output of the good or service.
• Joint ventures: In a joint venture, two parties come together to form a single entity that can control the market. This allows them to control the prices and output of the good or service, resulting in higher prices and reduced output.
• Exclusive agreements: Two parties can enter into an agreement to restrict the entry of other firms into the market, allowing them to control the prices and output of the good or service.

Types of Bilateral monopoly

There are three main types of bilateral monopoly:

• Cournot-Nash Model: This type of bilateral monopoly occurs when two firms produce a homogenous product and each firm sets their output to maximize profits. The Cournot-Nash model predicts that the firms will each set their output at a level where the marginal cost of producing the good is equal to the market price.
• Stackelberg Model: This type of bilateral monopoly occurs when one firm has the ability to set the price of the good and the other firm then sets its output to maximize profits. The Stackelberg model predicts that the firm that sets the price will set it at a level where the marginal cost of producing the good is equal to the marginal revenue from selling it.
• Bertrand Model: This type of bilateral monopoly occurs when two firms produce a homogenous product and each firm sets their price to maximize profits. The Bertrand model predicts that the firms will each set their price at a level where the marginal cost of producing the good is equal to the market price.

Steps of Bilateral monopoly

1. Negotiation: The two parties involved in a bilateral monopoly engage in negotiations to determine the price and quantity of the good or service being traded.
2. Agreement: After reaching an agreement on the price and quantity of the good or service being traded, the two parties enter into an exclusive agreement or a collusive agreement to restrict the entry of other firms into the market.
3. Price Setting: The two parties then set the price of the good or service, taking into account their respective bargaining powers.
4. Output Determination: The two parties then determine the output of the good or service based on the price they have set.

Advantages of Bilateral monopoly

• Bilateral monopoly can lead to benefits for both the buyer and the seller, such as cost savings and increased profits.
• The two parties involved in the market structure can negotiate prices and output to their mutual benefit.
• The two parties involved can also form exclusive agreements or collude to restrict the entry of other firms, which can increase their profits.

Disadvantages of Bilateral monopoly

• Bilateral monopoly can result in higher prices and lower output, reducing consumer welfare.
• The two parties involved in the market structure can have unequal bargaining power, resulting in one party having an advantage over the other.
• The two parties involved in the market structure can collude to restrict the entry of other firms, reducing competition and leading to higher prices and lower output.

Limitations of Bilateral monopoly

Bilateral monopoly has several limitations that can affect the efficiency of the market. These include:

• Lack of competition: The two parties involved in a bilateral monopoly can form exclusive agreements or collude to restrict the entry of other firms into the market, resulting in a lack of competition and higher prices.
• Bargaining power: If one party has more bargaining power than the other, they can influence the price of the good or service to their advantage, resulting in higher prices for the good or service.
• Efficiency losses: The pricing strategies of a bilateral monopoly can lead to efficiency losses, as the two parties may not be able to reach the most efficient price and output level due to their bargaining power.

Other approaches related to Bilateral monopoly

There are several other approaches which can be used to address the issues raised by bilateral monopoly. These include:

• Price restriction: Price restriction is a pricing strategy where the two parties involved agree to set a maximum price for the good or service. This can help to reduce prices and increase competition in the market, leading to improved consumer welfare.
• Price collusion: Price collusion is an agreement between the two parties to set a price for the good or service which is higher than the market equilibrium price. This can lead to higher prices and reduced consumer welfare.
• Bargaining: Bargaining is a negotiation between the two parties to reach an agreement on the price of the good or service. This can help to ensure that both parties are satisfied with the outcome, and can lead to more efficient outcomes for the market.

Overall, there are a number of other approaches which can be used to address the issues raised by bilateral monopoly. These approaches can help to reduce prices, increase competition and improve consumer welfare.

Bilateral monopoly — recommended articles

Market failure — Price controls — Price stickiness — Monopolistic competition — Oligopoly — Inelastic supply — Price Maker — Administered price — Monopson

References

• Bowley, A. L. (1928). Bilateral monopoly. The Economic Journal, 38(152), 651-658.
• Blair, R. D., Kaserman, D. L., & Romano, R. E. (1989). A pedagogical treatment of bilateral monopoly. Southern Economic Journal, 831-841.
• Machlup, F., & Taber, M. (1960). Bilateral monopoly, successive monopoly, and vertical integration. Economica, 101-119.