![]() The two firms will sooner or later start negotiations and will eventually reach an agreement about price, which will be settled somewhere in the range between P 1 and P 2, (P P P 1), depending on the bargaining skill and power of the firms. Given that the buyer wants to pay P 2 while the seller wants to charge P 1, there is indeterminacy in the market. However, the monopsonist does not buy from a lot of small firms which would be price- takers (that is, who would accept the price imposed by the single buyer), but from the monopolist, who wants to charge price P 1. The equilibrium of the monopsonist is shown by point e in figure 6.19 he would like to purchase X 2 units of equipment at a price P 2, determined by point a on the supply curve MC(= S). Thus in order to maximise his profit he would like to purchase additional units of X until his marginal outlay is equal to his price, as determined by the demand curve DD. In other words, curve ME is the marginal cost of equipment for the monopsonist-buyer (it is a marginal-outlay curve to the total-supply curve MC, with which the buyer is faced). The increase in the expenditure of the buyer (his marginal outlay or marginal expenditure) caused by the increases in his purchases is shown by the curve ME in figure 6.19. ![]() The MC (= S) curve is determined by conditions outside the control of the buyer, and it shows the quantity that the monopolist-seller is willing to supply at various prices. What are the monopsonist’s price terms? Clearly the MC curve of the producer represents the supply curve to the buyer: the upward slope of this curve shows that as the monopsonist increases his purchases the price he will have to pay rises. The buyer is aware of his power, and, being a profit maximiser, he would like to impose his own price terms to the producer. The producer-monopolist is selling to a single buyer who can obviously affect the market price by his purchasing decisions. However, the producer cannot attain the above profit-maximizing position, because he does not sell in a market with many buyers, each of whom would be unable to affect the price by his purchases. He would maximize his profit if he were to produce X 1 quantity of equipment and sell it at the price P 1. The equilibrium of the producer- monopolist is defined by the intersection of his marginal revenue and marginal cost curves (point e 1 in figure 6.19). Both firms are assumed to aim at the maximization of their profit. To illustrate a situation of bilateral monopoly assume that all railway equipment is produced by a single firm and is bought by a single buyer, British Rail. Under conditions of bilateral monopoly economic analysis leads to indeterminacy which is finally resolved by exogenous factors. The precise level of the price (and output), however, will ultimately be defined by non-economic factors, such as the bargaining power, skill and other strategies of the participant firms. Economic analysis can only define the range within which the price will eventually be settled. The equilibrium in such a market cannot be determined by the traditional tools of demand and supply. For example, if a single firm produced all the copper in a country and if only one firm used this metal, the copper market would be a bilateral monopoly market. ![]() Bilateral monopoly is a market consisting of a single seller (monopolist) and a single buyer (monopsonist). Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License. Use the information below to generate a citation. Then you must include on every digital page view the following attribution: If you are redistributing all or part of this book in a digital format, Then you must include on every physical page the following attribution: ![]() If you are redistributing all or part of this book in a print format, Want to cite, share, or modify this book? This book uses the
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