Bilateral monopoly

A bilateral monopoly is a market structure consisting of both a monopoly (a single seller) and a monopsony (a single buyer).[1]

Overview

Bilateral monopoly situations are typically analyzed using the theory of Nash bargaining games, and market price and output will be determined by forces like bargaining power of both buyer and seller, with a final price settling in between the two sides' points of maximum profit.[2] A bilateral monopoly model is often used in situations where the switching costs of both sides are prohibitively high.

Examples

• One example occurs when a labor union (a monopolist in the supply of labor) faces a single large employer in a factory town (a monopsonist).
• A peculiar example exists in the market for nuclear-powered aircraft carriers in the United States, where the buyer (the United States Navy) is the only one demanding the product, and there is only one seller (Huntington Ingalls Industries) by stipulation of the regulations promulgated by the buyer's parent organization (the United States Department of Defense, which has thus far not licensed any other firm to manufacture, overhaul, or decommission nuclear-powered aircraft carriers).
• A typical or showpiece example of bilateral monopoly is a lignite (brown coal) mine and a lignite based power station. Since transport of lignite is not economical, the power station is located close to the mine. The mine is monopolistic in producing lignite, and as the only buyer the power station acts as a monopsony.

See also

• Industrial organization
• New institutional economics
• Transaction cost

References

1. Mark Hirschey, Fundamentals of Managerial Economics, Cengage Learning, 2008, pp. 474
2. "DEFINITION of 'Bilateral Monopoly'". Investopedia. investopedia.com. Retrieved 28 January 2016.