1. The specific solution in the bilateral Monopoly situation requires developing models of the bargaining process. Explain with a diagram.

What Is a Bilateral Monopoly?

A bilateral monopoly exists when a market has only one supplier and one buyer. The one supplier will tend to act as amonopolypower and look to charge high prices to the one buyer. The lone buyer will look towards paying a price that is as low as possible. Since both parties have conflicting goals, the two sides must negotiate based on the relative bargaining power of each, with a final price settling in between the two sides' points of maximum profit.

This climate can exist whenever there is a small contained market, which limits the number of players, or when there are multiple players but the costs to switch buyers or sellers is prohibitively expensive.

Understanding Bilateral Monopolies

Bilateral monopoly systems have most commonly been used by economists to describe the labor markets of industrialized nations in the 1800s and the early 20th century. Large companies would essentially monopolize all the jobs in a single town and use their power to drive wages to lower levels. To increase their bargaining power, workers formedlabor unionswith the ability to strike and became an equal force at the bargaining table with regard to wages paid.

As capitalism continued to thrive in the U.S. and elsewhere, more companies were competing for the labor force, and the power of a single company to dictate wages decreased substantially. As such, the percentage of workers that are members of a union has fallen, while most new industries have formed without the need forcollective bargaininggroups among workers.

How a Bilateral Monopoly Works

Bilateral monopoly requires the seller and the buyer, who have diametrically opposite interests, to achieve a balance of their interests. The buyer seeks to buy cheap, and the seller tries to sell expensive. The key to a successful business for both is reaching a balance of interests reflected in a "win-win" model. At the same time, both the seller and the buyer are well aware of who they are dealing with.

Disadvantages of Bilateral Monopoly

Problems arise when neither party can determine the conditions of sale, and the negotiation goes beyond what is permissible. For example, instead of fair negotiation and exchanging draft contracts, the buyer and seller abuse their rights: they stop shipping goods, impose unprofitable and discriminatory conditions, send false information to each other, etc. This creates uncertainty and threatens the entire market.

A common type of a bilateral monopoly occurs in a situation where there is a single large employer in a factory town, where its demand for labor is the only significant one in the city, and the labor supply is managed by a well-organized and strongtrade union.

In such situations, the employer has no supply function that adequately describes the relationship between supply volume and product price. Therefore, the company must arbitrarily select a point on the market demand curve that maximizes his profit. The problem is that businesses in this situation are the only buyers of a monopolized product.

Consequently, its demand function for production resources is eliminated. Thus, to maximize his profit, the business must also choose a point on the seller's supply curve.

Compete Risk Free with $100,000 in Virtual Cash

Put your trading skills to the test with ourFREE Stock Simulator.Compete with thousands of Investopedia traders and trade your way to the top! Submit trades in a virtual environment before you start risking your own money.Practice trading strategiesso that when you're ready to enter the real market, you've had the practice you need.

2. Under what condition is a unique level of public good supplied at different allocation of private good ? Explain.

Private Good

This is a good which has rivalry and excludability. E.g. If you sell a bottle of Coca-Cola to one individual - others cannot consume it.

• Also, private goods have an opportunity cost, if we use resources to produce a bottle of Coca-Cola, we cannot use that glass, sugar and water to produce other goods.
• These goods are provided in a free market when a firm can make a profit from them.

Public Good

Apublic goodhas two characteristics:

• Non-rivalry - consuming the good doesn't reduce the amount available to other people.
• Non-excludable - once provided you can't stop anyone consuming it.

Examples of public goods include street lights, law and order and national defence.

• Typically, public goods are not provided in a free market because firms cannot charge people directly and there is scope for 'free-riding on other people paying for it.
• Note: Goods provided by the public sector (government) are not necessarily public goods. e.g. government provide education, but education is a merit good, not a public good)

Free Good

A free good is a good needed by society but available with noopportunity cost. It is a good without scarcity. For example, air is a free good, because we can breathe it as much as we want. By breathing,we do not diminish the available resource for other people.

Water is usually another free good. If you live by a river, you can take water without reducing the amount available to others. Though in some areas, water can become scarce in drought conditions - then water is no longer a free good.

• Note: a good may be given away for no charge (e.g. healthcare is free at the point of use) However, it is not a free good because there is an opportunity cost - in this case, healthcare is paid for out of taxes.

Demerit Good

• Ademerit goodis a good where people may be unaware of the costs or choose to ignore them. For example, people may over-consume alcohol or get addicted to cigarettes - even though this will damage their health.
• It requires a subjective opinion that people make 'wrong' choices. Some may see gambling as an example of a demerit good because it can lead to gambling addiction. Others may see it as 'harmless fun'
• Demerit goods often have negative externalities as well. If you smoke it gives passive smoking to others.

Normal, inferior and luxury goods

Inferior, normal and luxury goodsare to do with theincome elasticity of demand.

• Normal good- occurs when an increase in income leads to an increase in demand. Normal goods will have a positive YED.
• Inferior good- when an increase in income leads to afall in demand. It will have a negative YED (YED<0)
• Luxury good- when an increase in income causes a bigger percentage change in demand. YED >1

3. The sum of price weighted excess demand summed over all markets must be equal to zero. Explain.