Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

4.7 PRICE AND OUTPUT UNDER BILATERAL 
MONOPOLY 
 
Under bilateral monopoly in the market for a final product, 
the single buyer or monopolist is a consumer. The firm which 
produces that product (which has no close substitutes) is the 
monopolist supplier or seller. Analysis of pricing and output under 
bilateral monopoly in the product market is almost the same as we 
made in case of the exchange of this two goods between two 
individuals. The concepts of indifference curves, Edgeworth Box 
and contract curve explained there are fully applicable to the 
present case. However, a slight difference is that in the present 
case the single buyer is the consumer who has money to offer for 
the product he demands and purchases. Therefore, we shall take 
one product which a monopolist produces and sells and the 

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money which a single buyer of that product spends on it. But 
before discussing pricing and output under bilateral monopoly with 
the aid of indifference curves and contract curve, we shall explain 
them with the ordinary demand, marginal revenue and marginal 
cost curves. Consider Figure 4.9 where DD is the demand curve 
for the product of the buyer, which is based upon his marginal 
utility curve. Since there is a single buyer of the product, his 
demand curve DD would be the demand curve confronting the 
monopolist supplier and therefore DD would be average revenue 
(AR) curve for him. MR is the marginal revenue curve for the 
monopolist supplier corresponding to the demand curve DD. MC is 
the marginal cost curve of the monopolistic supplier. 
Let us now explain the relevant curves for the monopsonist 
buyer. If the monopsonist buyer assumes that he has the full 
power to set price subject to the cost situation of the supplier, then 
he would consider marginal cost curve MC of the monopolist as 
his supply curve of the product. In other words, if he thinks he can 
force the supplier to accept price set by him, then he would be 
supplied by the supplier the quantity of the product at which his 
marginal cost equals the price set by the monopsonist buyer. 
Thus, if the monopsonist thinks he has the complete power to set 
the price, the marginal cost curve of the monopolist will indicate 
average supply prices at which various corresponding quantities 
of the product would be offered to him. Hence marginal cost curve 
MC of the monopolist is the supply curve or the curve of the 
average supply prices to him which in Figure 4.9 is labelled as 
ASP. Since the average supply price (ASP) for the monopsonist 
rises as he obtains more quantity of the product, marginal supply 
price (MSP) and therefore the curve of marginal supply price 
(which may also be called marginal supply cost) will lie above the 
ASP curve, as is shown in the Figure 4.9 by the curve MSP. Thus, 
the curve of marginal supply price (MSP) is marginal to the curve 
of average supply price (ASP). 
 

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