Bilateral Monopoly

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A NOTE ON BILATERAL MONOPOLY(Refer Graph) 1. If there are competition at all stages, the solution is Xc Pc. 2. A monopsonist buyer who is also a monopolist seller of the product using input X: The monopsony power shows up in his operating on the curve marginal to the supply curve Sc, because his decision to buy one more unit makes the price of inputs rise. The impact of the decision to buy one more unit of X is the sum of two components: one, the new higher price on the additional unit which he decided to purchase, and two, the new higher price on all the earlier units. This makes the MMC rise faster than the supply curve. The monopoly Power in the product market shows up in his operating on the MR. This gets reflected in the market for input X as MRP. So his (the monopsonist-monopolist’s) optimum is XB PB. ‘PB’ is the price as indicated by the supply curve Sc, for quantity XB. 3. Seller of ‘X’ is a monopolist, and the buyer of X is a monopolist in the product market whose input is X. If the buyer of X, chooses not to exercise monopsony power, then the monopolist seller of X recognises that the buyer operates on MRP, and so MRP becomes the D facing him. He being a monopolist himself, will operate on a curve marginal to D, that is MMRP. He equates this to MC (Sc) and sells a quantity XM at price PM to the buyer of X. But if the buyer succeeds in exercising his monoposony power, he will be able to bring the price down to PB. So the price will range between PM and PB depending on who is able to exercise the power. 4. If the two firms decide to maximize joint profits, by acting as one firm, they would equate MRP to MC and operate at OX*, but the price they would agree upon could be anywhere between H (where the buyer gets no profit because the price at H is equal to the AVP) and L (where the seller gets no profit because at L, the price will be equal to the MC).

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