Bilateral Monopoly: Study with Video Lessons, Practice Problems & Examples

A bilateral monopoly occurs when a single buyer (monopsony) and a single seller (labor union) negotiate, exemplified by the Writers Guild of America and an employers' alliance. This negotiation leads to a struggle between the union's desire for higher wages and the monopsony's aim for lower wages. The outcome is uncertain, often resulting in a wage between the two extremes, fostering competitive results. The balance of negotiating power influences the final wage, making it more desirable than a scenario dominated by either party alone, thus promoting a more equitable market outcome.

Bilateral Monopoly

Alright. Now let's discuss the situation where there's only one buyer and one seller in a market. Let's check it out: a bilateral monopoly. So we're going to take what we've discussed in the previous couple of topics. We've discussed labor unions, and so we're going to combine them together. A monopsony where there's only one buyer in a market, right, a market with only one buyer and a labor union. So, we could think of the labor union as pooling all of the resources together and selling just unionized labor. So the only thing you can buy is unionized labor and there's only one person buying it, the buyer of the monopsony. So this is a market with a single buyer and seller. It's kind of rare, but it does come up, and a good example is the Writers Guild of America. So this is a union, a labor union here. This is basically TV show writers. They join the Writers Guild of America and they negotiate with an employer's alliance. So now, all the employers, CBS, MGM, NBC, they make an alliance as well where they're going to purchase the labor of the Writers Guild, right? So what are they going to do? They're going to negotiate. The labor union is going to negotiate with this monopsony, this employer alliance. So the only people who are buying is the alliance, and the only people who are selling is the union, right? The Alliance and the Union, kind of funny there. So this is a real-world example and every three years they're going to negotiate. The two parties renegotiate a pay deal. How much are the writers going to make, right? And this is obviously a very intense negotiation between the labor union and the employer's alliance there. So it's not very simple to say what the outcome of a bilateral monopoly is because it all comes down to the negotiating power of both of the groups. It leads to heavy negotiation and what are the goals of both groups? The employers want to pay a below average wage because they're the monopsony. Right? They're the ones hiring. They want to pay as little as possible for the employees, and the employees want the above-average wage that a union gets. Right? The unions fight for higher wages and the monopsony fights for lower wages. So what ends up happening is a big negotiation struggle between the two parties. So what happens in a bilateral monopoly? We could say that we've got two things here. If this looks similar to the monopsony graph that we dealt with, so we're going to have our demand for labor here, our supply of labor here. And what we'll say is that this is the wage that the labor union fights for up here. The labor union fights for this high wage, so I'll put WH for high wage while the monopsony is fighting for this low wage down here. Right? So this is the low wage that the monopsony is fighting for. So what's going to happen? They're both going to be negotiating and they're going to end up somewhere in the middle probably, right? They'll probably end up somewhere in the middle of these two. So what's the outcome? We really can't say. It's going to result in an unknown wage and an unknown equilibrium quantity. We're not really sure what's going to happen because it all comes down to the negotiation process. So, is it desirable to have this bilateral monopoly? Well, there are some conclusions that we can make. First, we know that the monopolies are going to cancel each other out, right? Since they both have this negotiating power, well it's not like one has more influence than the other because they both need each other equally, and their monopoly power that leverage that they would have had doesn't exist anymore. So it leads to near-competitive results where both need each other enough that it ends up being competitive. And if the negotiation power is roughly the same for both parties, they might actually agree on the competitive wage. So if we go back up to our graph, if the negotiating power was approximately equal, we might say, you know, they might end up anywhere on this spectrum. They might end up way down here if the monopsony has a lot of power. They may end up way up here if the union has a lot of power, but they'll likely end up somewhere in the middle. And if they have equal negotiating power, they might end up right at the equilibrium right here in the middle. And we might actually have an equilibrium situation based on the negotiating power of the two groups. Okay? So even if we don't exactly end up there, even if we end up maybe right here, it's better than one group having all the power. Right? It's going to give us more competitive results than just one group having the power. That's our last point here. The results are at a minimum more desirable than if there was just a monopsony or just the labor union. We still get more competitive situations. Cool. So bilateral monopoly, a big topic there is the negotiation process, right? There's a lot of negotiation because all of the negotiating power has been consolidated into these two groups, the employer that's hiring and the employee that's selling, and that's all. There's just one of each of them. Cool? Alright. Let's go ahead and move on to the next topic.

Here’s what students ask on this topic:

What is a bilateral monopoly and how does it differ from a monopsony?

A bilateral monopoly occurs when there is a single buyer (monopsony) and a single seller (labor union) in a market. In contrast, a monopsony involves only one buyer but multiple sellers. In a bilateral monopoly, both parties have significant negotiating power, leading to intense negotiations over wages and prices. The outcome is uncertain and often results in a wage or price that lies between the extremes desired by each party. This dynamic fosters more competitive results compared to a monopsony, where the single buyer can exert more control over the market, often leading to lower wages or prices.

How does the negotiation process work in a bilateral monopoly?

In a bilateral monopoly, the negotiation process involves intense bargaining between the single buyer (monopsony) and the single seller (labor union). Each party aims to achieve its goals: the monopsony seeks to pay the lowest possible wage, while the labor union strives for the highest possible wage. The outcome of these negotiations depends on the relative negotiating power of each party. If both parties have roughly equal power, they may agree on a wage close to the competitive equilibrium. The process is complex and can result in a wage that lies anywhere between the extremes, promoting a more balanced and competitive market outcome.

What are some real-world examples of bilateral monopolies?

A notable real-world example of a bilateral monopoly is the negotiation between the Writers Guild of America (a labor union) and an alliance of employers such as CBS, MGM, and NBC. In this scenario, the Writers Guild represents the single seller of unionized labor, while the employers' alliance acts as the single buyer. Every three years, these two parties engage in intense negotiations to determine the wages and working conditions for TV show writers. The outcome of these negotiations depends on the relative negotiating power of each party, often resulting in a wage that lies between the extremes desired by the union and the employers.

Why is the outcome of a bilateral monopoly uncertain?

The outcome of a bilateral monopoly is uncertain because it depends on the relative negotiating power of the single buyer (monopsony) and the single seller (labor union). Each party has its own goals: the monopsony aims to pay the lowest possible wage, while the labor union seeks the highest possible wage. The final wage or price is determined through intense negotiations, and it can lie anywhere between the extremes desired by each party. This uncertainty arises because the balance of power can shift, and the outcome is not predetermined, making it difficult to predict the exact wage or price that will be agreed upon.

What are the advantages of a bilateral monopoly over a monopsony or a monopoly?

A bilateral monopoly offers several advantages over a monopsony or a monopoly. In a monopsony, the single buyer has significant control over the market, often leading to lower wages or prices. In a monopoly, the single seller can set higher prices due to lack of competition. However, in a bilateral monopoly, the negotiating power is balanced between the single buyer and the single seller. This balance fosters more competitive results, as neither party can dominate the market. The outcome is often more equitable, with wages or prices closer to the competitive equilibrium, benefiting both parties and promoting a fairer market environment.