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Principles of Economics 2e

14.4 Bilateral Monopoly

Principles of Economics 2e14.4 Bilateral Monopoly

Learning Objectives

By the end of this section, you will be able to explain:
  • How firms determine wages and employment when a specific labor market combines a union and a monopsony

What happens when there is market power on both sides of the labor market, in other words, when a union meets a monopsony? Economists call such a situation a bilateral monopoly.

The graph compares monopsony to perfect competition for labor market outcomes. The x-axis is Labor, and the y-axis is Wages. There are three curves. The curve representing typical market supply for labor slopes upward from the bottom left to the top right. The curve representing the marginal cost of hiring additional workers also, slopes from the bottom left to the top right, but it is steeper, and therefore always above the regular market supply curve. The third curve is the labor demand, sloping from the top left to the bottom right. A line representing the wage preferred by the union intersects the marginal cost curve, and a line representing the wage preferred by the monopsony intersects the market supply curve.
Figure 14.14 Bilateral Monopoly Employment, L*, will be lower in a bilateral monopoly than in a competitive labor market, but the equilibrium wage is indeterminate, somewhere in the range between Wu, what the union would choose, and Wm, what the monopsony would choose.

Figure 14.14 is a combination of Figure 14.6 and Figure 14.11. A monopsony wants to reduce wages as well as employment, Wm and L* in the figure. A union wants to increase wages, but at the cost of lower employment, Wu and L* in the figure. Since both sides want to reduce employment, we can be sure that the outcome will be lower employment compared to a competitive labor market. What happens to the wage, though, is based on the monopsonist’s relative bargaining power compared to the union. The actual outcome is indeterminate in the graph, but it will be closer to Wu if the union has more power and closer to Wm if the monopsonist has more power.

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