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

• 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

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

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.