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EQUILIBRIUM, SHORT-RUN AGGREGATE MARKET: The state of equilibrium that exists in the short-run aggregate market when real aggregate expenditures are equal to full employment real production with no imbalances to induce changes in the price level or real production. In other words, the opposing forces of aggregate demand (the buyers) and short-run aggregate supply (the sellers) exactly offset each other. Equilibrium in the short-run aggregate market achieves balance in the product markets and financial markets, but not in the resource markets. It also involves simultaneous equilibrium in the aggregated financial and resource markets.

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BILATERAL MONOPOLY:

A market containing a single buyer and a single seller, or the combination of a monopoly market and a monopsony market. A market dominated by a profit-maximizing monopoly tends to charge a higher price. A market dominated by a profit-maximizing monopsony tends to pay a lower price. When combined into a bilateral monopoly, the buyer and seller both cannot maximize profit simultaneously and are forced to negotiate a price and quantity. Then resulting price could be anywhere between the higher monopoly price and the lower monopsony price. Where the price ends ups depends on the relative negotiating power of each side.
The bilateral monopoly model, with a single buyer and a single seller, can be used to analyze many types of markets, but it is most relevant for factor markets, especially those for labor services.

The bilateral monopoly model was developed to explain assorted labor markets operating in the early days of the U.S. industrial revolution, the late 1800s and early 1900s. During this period, large industrial activities (factories, mines, lumber operations) commonly created monopsony markets by dominating the labor market of a given community (a so-called company town). The expected monopsony outcome, especially low wages, inevitably resulted.

The workers sought to counter these less than desirable situations, by forming labor unions. The expressed goal of most unions was to monopolize the selling side of a labor market AND balance the monopsony power of the employer. This resulted in a bilateral monopoly.

Modern Examples

While markets dominated by a company-town-type monopsony employer on the buying side and a monopoly labor union on the selling side are rare in the modern economy, the bilateral monopoly model provides insight into other markets. Consider a few examples:
  • Industrial Labor: While the company town might be largely a thing of the past, a number of modern labor markets contain a dominate employer on the buying side and a dominate labor union on the selling side. Negotiations between large corporations and labor unions over wages and working conditions, such as those between General Motors and the United Autoworkers Union, approximate the bilateral monopoly model. While these markets are not, strictly speaking, comprised of pure monopoly sellers and pure monopsony buyers, the do have a definite bilateral monopoly flavor.

  • Consumer Goods: A number of modern consumption purchases, such as buying a house or a car, tend to fit the bilateral monopoly model. These purchases often include a single buyer and a single seller. As the bilateral model suggests, one-on-one negotiation over the price is a common feature of such purchases.

  • Athletic Labor Services: Perhaps the factor markets that come closest to the bilateral monopoly model are those involving the labor services of professional athletes. The National Football League, Major League Baseball, and National Basketball Association come very close to being monopsony buyers of athlete labor services. Players in each league are also represented by a players union, including the National Football League Players Association, Major League Baseball Players Association, and National Basketball Players Association. While the wage rates tend to be significantly higher for athletes than for factory workers, the underlying process is much the same.

A Bilateral Lumber Monopoly

Bilateral Lumber Monopoly
Bilateral Lumber Monopoly
A hypothetical bilateral monopoly labor market is presented in this exhibit. On the buying side is the Natural Ned Lumber Company, a hypothetical lumbering operation in the isolated Jagged Mountains region north of the greater Shady Valley metropolitan area. Everyone who lives in the nearby community of Lumber Town either works for the Natural Ned Lumber Company or they do not work at all. This makes the Natural Ned Lumber Company a monopsony buyer.

On the selling side is the United Tree Choppers Union. The employees of the Natural Ned Lumber Company, after succumbing to low monopsony wages for years, formed the United Tree Choppers Union. The United Tree Choppers Union speaks for ALL of the Natural Ned Lumber Company employees, essentially controlling the supply-side of this particular labor market. This makes the United Tree Choppers Union a monopoly seller.

What results from this bilateral monopoly is the need for negotiation between the monopoly and the monopsony. Without the United Tree Choppers Union monopoly on the selling side, the Natural Ned Lumber Company monopsony maximizes profit by paying 37,000 workers a wage of $8.40 per hour. Without the Natural Ned Lumber Company monopsony on the buying side, the United Tree Choppers Union monopoly maximizes profit (that is, member income) by charging a wage of $15 per hour to employ 30,000 workers. The two sides need to negotiate a price. But what price?

Unlike other output analyses, there is no way of knowing the price. It could be $8.40, it could be $15, or (more likely) it could be anywhere between. Where the price ends up depends on the relative negotiation power of each side. If the Natural Ned Lumber Company is extremely powerful, with oodles of profit, with tons of inventory available for sale, or with an extremely talented team of negotiators, then the price might end up close to $8.40. However, if the United Tree Choppers Union employees charismatic negotiators, has unwavering support from every employee, and has a large bank account, then the price might end up close to $15.

There is no way of knowing in advance.

A Closing Word on Efficiency

Bilateral monopoly does not achieve an efficient allocation of resources like that found with perfect competition. Interestingly, though, it can achieve a more efficient allocation than that of either a monopsony buyer by itself or a monopoly seller by itself. While monopsony and monopoly acting alone tend to be extremely inefficient, when combined, efficiency often improves. This outcome suggests that "two wrongs do make a right."

The reason is that the market control of the monopsony buyer is countered by the market control of the monopoly seller. This, by the way, is how a competitive market achieves efficiency. The key is that perfect competition has a large number of competitors on both sides rather than only one.

This process of balancing market control is at the root of bilateral monopoly. Returning to the early days of the U.S. industrial revolution, many labor markets were dominated by a monopsony buyer or employer. To counter this monopsony market control, workers formed labor unions with the goal of becoming monopoly sellers. When the two sides achieved relative balanced, the resulting wage approached that of a competitive market. While the bilateral monopoly is not perfect and it is not efficient, it is often an improvement over the monopsony market.

Of course, the key word is "balance." Should the balance tip in the direction of the monopoly labor union, such as a powerful national union on the selling side and hundreds of smaller, independent employers on buying side, then inefficiency re-emerges.

<= BENEFIT PRINCIPLEBILATERAL MONOPOLY, FACTOR MARKET ANALYSIS =>


Recommended Citation:

BILATERAL MONOPOLY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: October 31, 2014].


Check Out These Related Terms...

     | bilateral monopoly, factor market analysis | factor market analysis | perfect competition, factor market analysis | monopsony, factor market analysis | monopoly, factor market analysis |


Or For A Little Background...

     | monopsony | monopoly | factor demand | factor supply | marginal revenue product | marginal factor cost | marginal cost | marginal revenue | demand curve | supply curve | profit maximization | efficiency |


And For Further Study...

     | factor market, efficiency | perfect competition, efficiency | monopsony, efficiency | monopsony, minimum wage | compensating wage differentials | perfect competition, short-run production analysis |


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