Monopsony denotes a market condition when there is solitary consumer of a product or service. It is relevant to any condition in which there is a monopoly constituent in purchasing. For example when clients of a certain good are structured, or when a communalist regime legalize importation or when a definite person comes about to have a liking for some products which no one else necessitate or when a single big factory in an inaccessible vicinity is the solitary consumer of some marks of effort there is monopsony. Monopsony is defined as “the case of a single buyer who is not in competition with any other buyers for the output which he seeks to purchase and as a situation in which entry into the market by other buyers is impossible.”
Bilateral monopoly denotes a market condition in which a solitary manufacturer of merchandise faces a solitary purchaser of that commodity.
- There is a solitary commodity with no close surrogates
- The monopolist is its sole manufacturer or seller
- The monopsonist is its only consumer
- The monopolist and the monopsonist are equally liberated to optimise their own person profits
Price output Determination
Given these postulations, price and output ascertainment under bilateral monopoly is presented in the sketch where D is the demand curve of the monopolist’s product and MR is its corresponding marginal revenue curve of the monopolist. The MC curve of the monopolist is the supply curve S factoring the monopsonist. The upward incline indicates that if monopsonist wants to buy more he will have to pay a higher price.
So when he buys more units of the product his marginal outlay or marginal expenditure increases. This is shown by the upward inclination ME curve which is the marginal expenditure curve to the total supply curve MC/S. The curve D is the marginal utility MU curve of the monopsonist.
Let us first consider the equilibrium position of the monopolist. The monopolist is in equilibrium at point E where his MC curve cuts the MR curve from below. His profit maximising price is OP1 (=MS) at which he will sell OM quantity of the product. The monopsonist is in equilibrium at point B where his marginal expenditure curve ME intersects the demand curve D / MU.
He buys OQ units of the product at OP2 (=QA) price, as determined by point A on the supply curve MC / S. So there is disagreement over price between the monopolist who want to charge a higher price OP1 and the monopolist who wants to pay a lower price OP2. From a theoretical viewpoint there is indeterminacy in the market. In actuality the actual quantity of the product sold and its price depends upon the relative bargaining strength of the two.
The greater the relative bargaining strength of the monopolist the closer will price be to OP1 and the greater the relative bargaining strength of the monopsonist the closer will be to OP2. Thus the price will settle somewhere between OP1 and OP2.
If the monopoly and monopsony firms merge into a single firm with the monopsonist taking over the monopoly firm, the MC / S curve of the monopsonist becomes his marginal cost curve. The merged firm would thus maximise its profits at point F where its MC/S curve cuts the D/MU. It ill supply and use OT output at OP3 price. In this situation the merged firms get much larger output (OT) than the monopoly output (OM) at a lower price (OP2) than the monopoly price (OP1).
However it may not be possible to merge the monopoly firm which the monopsony firm. Economists have suggested another solution to problem of bilateral monopoly, that of joint profit maximisation. In this case, the monopolist and monopsonist a free on the quantity to be sold and bought to each other but disagree on the price to be charged. On this basis they want to maximise joint profits because they feel that they have got information about each other’s wants and aspirations.
This case is illustrated in the below diagrammatic representation where the monopolist is in equilibrium at X when his MC/S curve = MR curve. He wants to sell OQ quantity at OP1 (=QY) price. Conversely, the monopsonist is in equilibrium at point Y when his demand curves D / MU = ME curve.
He wants to buy OQ quantity at OP2 price. Based on the relative bargaining strength of each other, the price can be anywhere between P2 and P1 and is thus indeterminate. But their joint profits are P1P2 x OQ that can be divided between the monopolist and the monopsonist in ratio.
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- Applications of Demand and Supply Analysis under Perfect Competition
- Concepts of Revenue
- Derived Demand, Joint Supply
- Determination of Profit Maximisation under monopolist situation
- Duopoly and Oligopoly
- Equilibrium of the Firm and Industry
- Forms of Market Structure
- Importance of Time Element in Price Theory
- Joint Demand Supply
- Linear Programming
- Long Run Equilibrium of Firm and Industry
- Market Structures
- Monopolistic Competition
- Objectives of Business Firm
- Oligopoly, Cournot's Oligopoly Model
- Pricing of Public Undertakings
- Profit Maximisation, Full cost, Pricing and Sales Maximisation
- Pricing Under Perfect Competition - Demand Supply - Basic Framework
- Profit Price Policy
- Resource allocation under monopoly
- Short, Long Run Supply Curve of the Firm and Industry
- Similarities and Dissimilarities between Monopoly Competition and Perfect Competition
- Supply Its Law - Elasticity and Curve
- The Nature of Costs and Cost Curves
- Williamson's Utility Maximisation