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

 
Figure 4.9 Limits of Price and Output Under Bilateral 
Monopoly
 
Now, if the monopolist supplier thinks that, as a monopolist of 
the product, he has the usual power to determine any price and 
output on the demand curve of the buyer, then to maximize his 
own profits, he will equate his marginal cost with the marginal 
revenue. As will be seen from Figure 4.9, he will produce (or 
supply) OQ
1 
and set price OP
1
 at which marginal cost is equal to 
marginal revenue. In other words, most profitable price for the 
monopolist supplier is OP
1
 and most profitable quantity produced 
and supplied is OQ
1
. 
 
On the other hand, the monopsonist buyer by assuming 
that he has the full power to set the price and in order- to 
maximize his satisfaction he will equate his marginal supply price 
(MSP) with his marginal utility (or the price he is prepared to pay). 
Since demand curve DD indicates his marginal utility or the price 
he is prepared to pay, he will be maximizing satisfaction by 
purchasing OQ
2
. It will be noticed from Figure 4.9 that price OP
2
 is 
much lower than OP
1
that is, the price OP
1
which the monopolist 
wants to set is higher than the price OP
2
which the monopsonist 
wants to set. 
It is clear from above that when both the buyer and supplier 
think themselves to be price markers and therefore act 
autonomously, they reach at different prices as well as at different 
quantities. But since by definition neither for buyer, nor for seller, 
any alternative course is open and both of them have to trade with 
each other, they have to agree on some price. Therefore, they will 
negotiate and bargain with each other. The actual price which may 
be agreed upon as a result of negotiation and bargaining may be 
anywhere between OP
1
and OP
2
. Economic analysis does not 

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help us to indicate exactly what price will emerge out of 
negotiation and bargaining, since it does not depend upon any 
economic factors. The exact price at which the settlement will be 
reached depends upon bargaining skill and power of the buyer 
and seller. Since price can end up anywhere between OP
1
and 
OP
2
, it is said to be indeterminate within these limits.