In economics, a bilateral monopoly refers to a market structure in which there is only one buyer (monopsony) and one seller (monopoly) for a particular product or service. Unlike more common market structures such as perfect competition or monopoly, bilateral monopoly involves a unique dynamic where both the buyer and seller have significant market power and can influence prices and quantities exchanged.
Single Seller: In a bilateral monopoly, there is only one seller, known as a monopoly. This seller has substantial control over the price and quantity of the product or service being exchanged in the market.
Single Buyer: Conversely, there is only one buyer, known as a monopsony, who dominates the demand side of the market. The monopsony has the power to influence the prices it pays for inputs or products.
Negotiation: Exchange in a bilateral monopoly typically involves negotiation between the monopolistic seller and monopsonistic buyer. Both parties seek to maximize their own interests, leading to a bargaining process to determine the terms of trade.
Price-Setting Power: Both the monopoly seller and monopsony buyer have significant price-setting power due to their respective market dominance. The outcome of negotiations between them determines the final price and quantity exchanged in the market.
Implications of Bilateral Monopoly
Price Volatility: Bilateral monopoly can lead to price volatility as negotiations between the seller and buyer can result in fluctuating prices over time. This volatility can create uncertainty for both parties and may impact their investment and production decisions.
Market Power: Both the monopoly seller and monopsony buyer possess significant market power, which can result in outcomes that are not Pareto optimal (where no one can be made better off without making someone else worse off). The exercise of market power by either party can lead to inefficiencies and suboptimal outcomes in resource allocation.
Distribution of Surplus: The outcome of negotiations in a bilateral monopoly determines the distribution of surplus between the seller and buyer. The bargaining power of each party influences the extent to which they capture economic rent, potentially leading to disputes over the division of gains from trade.
Examples of Bilateral Monopoly
Labor Markets: In some industries, particularly those with strong labor unions or highly specialized skills, bilateral monopoly may arise in labor markets. Employers (monopsonies) negotiate with labor unions (monopolies) representing workers to determine wages and working conditions.
Commodity Markets: Bilateral monopoly can also occur in markets for commodities with limited suppliers and buyers. For example, in the agricultural sector, farmers (monopolies) may negotiate prices with large agribusiness firms (monopsonies) for the sale of their crops.
Natural Resource Markets: Markets for natural resources such as oil, gas, and minerals can exhibit bilateral monopoly characteristics. Resource extraction companies (monopolies) negotiate prices with governments or large buyers (monopsonies) for the sale of these resources.
Conclusion
Bilateral monopoly represents a unique market structure characterized by the interaction of a single seller and a single buyer, each possessing significant market power. The negotiation process between the monopoly seller and monopsony buyer determines prices and quantities exchanged in the market, with implications for price volatility, market power, and the distribution of surplus. While bilateral monopoly situations are relatively rare, they can have important economic consequences and require careful consideration from policymakers and market participants alike.
Related Concepts
Description
When to Apply
Perfect Competition
Perfect Competition is a market structure characterized by a large number of buyers and sellers, homogeneous products, perfect information, ease of entry and exit, and no market power. In perfect competition, firms are price takers, meaning they cannot influence market prices and must accept the prevailing market price as given. Likewise, consumers have full information about product prices and qualities and can make rational purchasing decisions based on price and utility. Perfect competition serves as a benchmark for analyzing market efficiency, consumer welfare, and resource allocation.
– When analyzing market efficiency or evaluating consumer welfare in competitive industries. – Particularly in understanding the characteristics of perfect competition, such as price-taking behavior, market equilibrium, and allocative efficiency, and in exploring techniques to apply perfect competition theory, such as supply-demand analysis, elasticity calculations, and market structure assessments, to assess the competitiveness of markets, determine market outcomes, and predict the effects of policy interventions or market interventions on consumer choice, producer behavior, and economic welfare.
Monopoly
Monopoly is a market structure characterized by a single seller or producer that dominates the entire market for a particular product or service. In a monopoly, the monopolist faces no competition and has significant market power to control prices, output levels, and market entry. Monopolies can arise due to barriers to entry, such as patents, economies of scale, or government regulations, and can result in higher prices, reduced consumer choice, and allocative inefficiency. Monopoly regulation aims to prevent abuses of market power and promote competition in markets.
– When assessing market power or evaluating pricing strategies in monopolistic industries. – Particularly in understanding the characteristics of monopoly, such as price-setting behavior, output restrictions, and deadweight loss, and in exploring techniques to analyze monopoly behavior, such as market concentration indices, pricing models, and consumer surplus calculations, to assess the effects of monopolistic practices on market outcomes, consumer welfare, and economic efficiency and to design policies or interventions to promote competition, innovation, and consumer choice in monopolistic markets.
Monopolistic Competition
Monopolistic Competition is a market structure characterized by many competing firms that offer differentiated products or services. In monopolistic competition, firms have some degree of market power to set prices above marginal cost but face competition from close substitutes and potential entry of new firms. Product differentiation allows firms to differentiate their offerings through branding, advertising, or product features, enabling them to charge higher prices and earn positive economic profits in the short run. Monopolistic competition can lead to product diversity, innovation, and non-price competition among firms.
– When analyzing product differentiation or evaluating market competition in heterogeneous industries. – Particularly in understanding the characteristics of monopolistic competition, such as product differentiation, price-setting behavior, and short-run versus long-run equilibrium, and in exploring techniques to assess monopolistic competition, such as market surveys, demand estimation, and brand valuation, to identify competitive strategies, market trends, and consumer preferences and to predict the effects of entry, exit, or product innovation on firm profitability, market shares, and consumer surplus in monopolistically competitive markets.
Oligopoly
Oligopoly is a market structure characterized by a small number of large firms or producers that dominate the market for a particular product or service. In oligopolistic markets, firms compete with a few rivals and face interdependence in pricing, output decisions, and strategic interactions. Oligopolies can arise due to barriers to entry, economies of scale, or collusion among firms, and can result in price rigidity, non-price competition, and strategic behavior among competitors. Oligopoly regulation aims to prevent anti-competitive practices and promote market efficiency and consumer welfare.
– When analyzing strategic interactions or evaluating market concentration in concentrated industries. – Particularly in understanding the characteristics of oligopoly, such as strategic interdependence, collusion potential, and price leadership, and in exploring techniques to study oligopoly behavior, such as game theory models, strategic pricing analysis, and market concentration measures, to assess the effects of oligopolistic competition on market outcomes, consumer welfare, and economic efficiency and to design policies or interventions to promote competition, deter collusion, and protect consumers in oligopolistic markets.
Duopoly
Duopoly is a market structure characterized by two dominant firms or producers that dominate the market for a particular product or service. In duopolistic markets, firms compete head-to-head and face strategic interactions in pricing, output decisions, and market entry. Duopolies can arise due to economies of scale, technological advantages, or strategic alliances among firms, and can result in price competition, product differentiation, and market segmentation. Duopoly regulation aims to prevent collusion and promote competition and innovation in markets.
– When assessing market rivalry or evaluating duopolistic strategies in two-firm industries. – Particularly in understanding the characteristics of duopoly, such as strategic rivalry, price leadership, and collusion risks, and in exploring techniques to analyze duopoly behavior, such as Cournot-Nash equilibrium, Bertrand competition, and Stackelberg leadership, to assess the effects of duopolistic competition on market outcomes, consumer welfare, and economic efficiency and to design policies or interventions to foster competition, deter anti-competitive practices, and enhance consumer choice in duopolistic markets.
Natural Monopoly
Natural Monopoly is a market structure characterized by economies of scale that result in a single firm or producer being able to supply the entire market at the lowest cost. In natural monopolies, the average total cost declines over the entire range of market demand, allowing the incumbent firm to operate efficiently and profitably without facing competition. Natural monopolies often arise in industries with high fixed costs, such as utilities, telecommunications, or infrastructure, where duplication of facilities is economically inefficient. Natural monopoly regulation aims to prevent monopoly abuse and promote efficiency and affordability in essential services.
– When assessing market structure or evaluating regulatory policies in utility or infrastructure industries. – Particularly in understanding the characteristics of natural monopoly, such as economies of scale, cost structure, and pricing regulation, and in exploring techniques to regulate natural monopolies, such as rate-of-return regulation, price caps, and incentive mechanisms, to ensure fair competition, efficient resource allocation, and consumer protection in natural monopoly industries and to balance the trade-offs between monopoly efficiency and consumer welfare in regulated markets.
Regulated Monopoly
Regulated Monopoly is a market structure where a single firm or producer operates in a monopolistic market but is subject to government oversight and regulation to protect consumer interests and promote economic efficiency. In regulated monopolies, the government sets prices, controls entry, and monitors quality to prevent monopoly abuse, ensure fair competition, and promote universal access to essential services. Regulated monopolies often operate in industries with natural monopolies, such as utilities, transportation, or postal services, where private competition is impractical or inefficient. Regulation aims to balance the interests of consumers, producers, and society in regulated markets.
– When evaluating market performance or analyzing regulatory frameworks in monopolistic industries. – Particularly in understanding the characteristics of regulated monopoly, such as price regulation, quality standards, and universal service obligations, and in exploring techniques to regulate monopolies, such as price caps, profit controls, and performance incentives, to ensure efficient resource allocation, consumer protection, and public welfare in regulated markets and to design policies or interventions to achieve social objectives and economic efficiency in monopolistic industries while balancing the interests of consumers, producers, and regulators.
Bilateral Monopoly
Bilateral Monopoly is a market structure characterized by a single buyer (monopsony) facing a single seller (monopoly) in a transactional relationship. In bilateral monopolies, both the buyer and seller have significant market power to negotiate prices, terms, and quantities, leading to strategic interactions and bargaining outcomes. Bilateral monopolies can arise in industries with few suppliers and buyers, such as agricultural markets, labor markets, or supplier-dominated industries, where transactions are bilateral and subject to bargaining or negotiation. Bilateral monopoly regulation aims to prevent market abuses and promote fair and efficient transactions between buyers and sellers.
– When analyzing market power or evaluating bargaining strategies in buyer-seller relationships. – Particularly in understanding the characteristics of bilateral monopoly, such as bargaining power, price determination, and transaction outcomes, and in exploring techniques to regulate bilateral monopolies, such as price mediation, contract enforcement, and antitrust enforcement, to ensure fair competition, efficient resource allocation, and consumer welfare in bilateral monopoly markets and to design policies or interventions to prevent market distortions and promote competitive outcomes in transactional relationships between buyers and sellers.
Contestable Market
Contestable Market is a market structure characterized by low barriers to entry and exit, where firms can enter or leave the market easily and compete with existing firms without significant sunk costs or penalties. In contestable markets, potential competition constrains the behavior of incumbent firms, even if they hold monopoly or oligopoly power, by threatening to enter the market and compete away excess profits. Contestable markets can exhibit competitive outcomes and efficient resource allocation despite the presence of dominant firms, as long as entry and exit are unconstrained and potential competition is credible. Contestable market theory challenges the traditional view that market structure alone determines market behavior and outcomes.
– When assessing market contestability or evaluating entry barriers in concentrated industries. – Particularly in understanding the characteristics of contestable markets, such as entry conditions, competitive threats, and incumbent behavior, and in exploring techniques to analyze contestable markets, such as contestability tests, entry-exit dynamics, and market structure assessments, to identify opportunities for entry, predict market responses, and assess the effects of market liberalization or deregulation on market competition, efficiency, and consumer welfare in contestable markets.
A total addressable market or TAM is the available market for a product or service. That is a metric usually leveraged by startups to understand the business potential of an industry. Typically, a large addressable market is appealing to venture capitalists willing to back startups with extensive growth potential.
A microniche is a subset of potential customers within a niche. In the era of dominating digital super-platforms, identifying a microniche can kick off the strategy of digital businesses to prevent competition against large platforms. As the microniche becomes a niche, then a market, scale becomes an option.
In simple terms, market validation is the process of showing a concept to a prospective buyer and collecting feedback to determine whether it is worth persisting with. To that end, market validation requires the business to conduct multiple customer interviews before it has made a significant investment of time or money. A transitional business model is an example of market validation that helps the company secure the needed capital while having a market reality check. It helps shape the long-term vision and a scalable business model.
Market orientation is an approach to business where the company focuses more on the behaviors, wants, and needs of customers in its market. A company will first target a niche market to prove a commercial use case. And from there, it will create options to scale.
In a tech-driven business world, companies can move toward market expansion by creating options to scale via niches. Thus leveraging transitional business models to scale further and take advantage of non-linear competition, where today’s niches become tomorrow’s legacy players.
Digital and tech business models can be classified according to four levels of transformation into digitally-enabled, digitally-enhanced, tech or platform business models, and business platforms/ecosystems.
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.
Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable business model. And as the product is offered at wider and wider market segments, it’s important to align product, business model, and organizational design, to enable wider and wider scale.
Developing a successful business strategy is about finding the proper niche, where to launch an initial version of your product to create a feedback loop and improve fast while making sure not to run out of money. And from there create options to scale to adjacent niches.
Business modelinnovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.
In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.
A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
