Bilateral Monopoly: Definition, Characteristics, Examples

What Is a Bilateral Monopoly?

A bilateral monopoly exists when a market has only one supplier and one buyer. The one supplier will tend to act as a monopoly power and look to charge high prices to the one buyer. The lone buyer will look towards paying a price that is as low as possible. Since both parties have conflicting goals, the two sides must negotiate based on the relative bargaining power of each, with a final price settling in between the two sides' points of maximum profit.

This climate can exist whenever there is a small contained market, which limits the number of players, or when there are multiple players but the costs to switch buyers or sellers is prohibitively expensive.

In markets where capitalism thrives, the power of a single company to dictate wages decreases substantially.

Understanding Bilateral Monopolies

Bilateral monopoly systems have most commonly been used by economists to describe the labor markets of industrialized nations in the 1800s and the early 20th century. Large companies would essentially monopolize all the jobs in a single town and use their power to drive wages to lower levels. To increase their bargaining power, workers formed labor unions with the ability to strike and became an equal force at the bargaining table with regard to wages paid.

As capitalism continued to thrive in the U.S. and elsewhere, more companies were competing for the labor force, and the power of a single company to dictate wages decreased substantially. As such, the percentage of workers that are members of a union has fallen, while most new industries have formed without the need for collective bargaining groups among workers.

How a Bilateral Monopoly Works

Bilateral monopoly requires the seller and the buyer, who have diametrically opposite interests, to achieve a balance of their interests. The buyer seeks to buy cheap, and the seller tries to sell expensive. The key to a successful business for both is reaching a balance of interests reflected in a “win-win” model. At the same time, both the seller and the buyer are well aware of who they are dealing with.

Disadvantages of Bilateral Monopoly

Problems arise when neither party can determine the conditions of sale, and the negotiation goes beyond what is permissible. For example, instead of fair negotiation and exchanging draft contracts, the buyer and seller abuse their rights: they stop shipping goods, impose unprofitable and discriminatory conditions, send false information to each other, etc. This creates uncertainty and threatens the entire market.

A common type of a bilateral monopoly occurs in a situation where there is a single large employer in a factory town, where its demand for labor is the only significant one in the city, and the labor supply is managed by a well-organized and strong trade union.

In such situations, the employer has no supply function that adequately describes the relationship between supply volume and product price. Therefore, the company must arbitrarily select a point on the market demand curve that maximizes his profit. The problem is that businesses in this situation are the only buyers of a monopolized product.

Consequently, its demand function for production resources is eliminated. Thus, to maximize his profit, the business must also choose a point on the seller’s supply curve.