What Is a Bilateral Monopoly?

A bilateral monopoly is a situation with two principal parties that represent the major players in their respective roles, to the extent that no other suitable competitors can be found on either side of the transaction. In simpler terms, experts refer to the situation is having a “single buyer and a single seller.” The etymology of the phrase suggests its meaning, where a single monopoly is simply a party controlling industry, and the use of the word “bilateral” refers to both sides of a transactional situation.

In complex markets, bilateral monopolies can arise in many different ways. These sorts of situations can occur in much the same way as a traditional monopoly, where companies get big enough to dominate a field by acquiring all of the smaller competitors in their industry. Where two of these monopolies need to do business, the result could be described as a bilateral monopoly.

Some other modern examples of this sort of situation more accurately describe how bilateral monopolies would happen in most current contexts. Experts refer to these situations as involving “relationship specific investments,” where companies or other parties invest time, money, or efforts in sympathetic ways that leave them tied to another party somehow. In many of these situations, the relationship involves offering skilled services for money.

An example of a modern bilateral monopoly would be a set of skilled workers who apply to and join a company that dominates within its industry. Over time, these workers come to acquire an even higher level of skill in the specific processes unique to that company. If, after a time, the workers are unable to find satisfactory work outside of the firm, and the firm is similarly unable to find satisfactory replacement workers, this is a bilateral monopoly that has been caused by a mutual investment focused toward the specific corporate goals of the employer.

Another common example of this situation is a single trade union negotiating with a single employer that has a monopoly over either an entire industry, or the local manifestation of an industry or field. Analyzing negotiations between a large trade union and a large company often reveals some characteristics of this type of situation. In general, certain kinds of arbitration or legal dealings may apply to these transactions, where using the term, “bilateral monopolies,” may help outside parties to figure out what’s going on with a particular negotiation or proposed transaction.