Bilateral monopoly price setting occurs in a market structure where there is a single seller (monopoly) and a single buyer (monopsony) negotiating the price of a good or service. In this scenario, both parties have significant power: the seller can influence the price due to the lack of competition, while the buyer can affect the seller's production decisions due to their unique purchasing position. The equilibrium price is determined through negotiation, often resulting in a price that is higher than the competitive market price but lower than the monopolistic price that would occur in a seller-dominated market.
Key factors influencing the outcome include:
Mathematically, the price can be represented as a function of the seller's marginal cost and the buyer's marginal utility , leading to an equilibrium condition where maximizes the joint surplus of both parties involved.
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