The upper bound is the price that would be fixed if the seller had no bargaining power, and the lower bound is the price that would be fixed if the buyer had no bargaining power. The relative bargaining power of buyers and sellers reduces this uncertainty to a bounded solution. This is because the final price in a bilateral monopoly market is generated by the bargaining process between buyers and sellers. In economic theory, the price in a bilateral monopoly market was initially considered to be indeterminate. In this case, the bilateral monopoly quickly became a structure of vertical integration with Standard Oil being both the monopolist and monopsonist. Standard Oil forced the railroads to exclusively service Standard Oil's business and to lower their prices otherwise Standard Oil would pull all of their business from that railroad company. The market power that Standard Oil acquired from its monopoly of oil production allowed it to exert unreasonable control over the railroads used to transport their oil. An example of a monopolist using vertical integration to maximise their control is Standard Oil in the United States which is best known for its monopoly of oil production and refinery in the late nineteenth and early twentieth century. The lack of alternatives within a given market gives way for vertical integration where the monopolist and monopsonist merge to control both upstream and downstream entities.

A bilateral monopoly model is often used in situations where the switching costs of both sides are prohibitively high. This strategy can be analysed 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. Arthur Lyon Bowley argued that both parties follow a price leadership strategy in which the seller sets the price to maximise their profits and the buyer responds by setting the quantity to maximise their profits. Characteristics of Bilateral MonopolyĪ bilateral monopoly requires the cooperation of both the monopolist and monopsonist to maximise their respective profits. As in the symmetric case, manufacturers and retailers choose higher social attention in a cooperative framework than in a non-cooperative one, and these choices fully resolve the problem of double marginalization. It also leads to an increase in the self-profit of the bargaining firm and a decrease in the profits of other firms, but has no effect on sales volume, price, total profits, consumer surplus, or social surplus. The increase in bargaining power of one firm in a bilateral monopoly results in an increase in the social attention of the other firm, as well as a decrease in its own social attention. However, we will use the term bilateral monopoly because it is the conventional and widely understood phrase.

Thus, the theory of bilateral monopoly might also be referred to as the theory of bilateral oligopoly, or theory of bilaterally constrained competition, or the theory of bargaining. Furthermore, whether or not the negotiation parties are monopolists in the strict sense of the term, most of the implications of the bilateral monopoly theory hold true. As a result, the theory of bilateral monopoly and the theory of bargaining are identical. So most of the conclusions of the bilateral monopoly theory hold whether or not the bargaining parties are monopolists in the strict sense of the word. īargaining between buyers and sellers is in all essentials similar to bargaining between two people. The same power imbalance occurs in a monopsony where the monopsonist is the only buyer in a market of many sellers. In a standard monopoly structure, the monopolist sells to multiple buyers with no market power, thereby giving the monopolist the power to set their own price and quantity to optimise their profits. 2 Characteristics of Bilateral Monopoly.

Bilateral monopoly examples