In industrial organisation, a bilateral monopoly occurs under what combination of market power on the buying and selling sides?

Introduction / Context:
Bilateral monopoly is a specialised market structure studied in industrial organisation and labour economics. It describes a situation where there is market power on both the selling side and the buying side. Understanding this structure helps explain wage determination in some labour markets and price negotiations in certain raw material markets. The term can be confusing because it combines two different types of market power. This question tests your ability to recall and apply the exact definition of bilateral monopoly by identifying the correct combination of a monopolist and a monopsonist within a single market.

Given Data / Assumptions:

• We are considering a single market for a particular good or factor of production.
• A monopoly is defined as a single seller with control over supply in that market.
• A monopsony is defined as a single buyer with control over demand in that market.
• Bilateral monopoly refers to a situation where both sides of the market have significant power.

Concept / Approach:
The concept combines two classic market imperfections. On the one hand, there is a monopoly, which is a firm that is the sole supplier of a good or service. On the other hand, there is a monopsony, which is a buyer that is the sole purchaser of that good or service. When these two agents interact, neither side can simply take the market price as given. Instead, price and quantity are often determined by bargaining, negotiation, or institutional rules. The defining feature of bilateral monopoly is therefore the presence of one seller and one buyer with substantial market power. Any option that suggests many buyers or many sellers cannot describe a bilateral monopoly.

Step-by-Step Solution:
Step 1: Recall that a monopoly means one seller in the market. Step 2: Recall that a monopsony means one buyer in the market. Step 3: Combine these ideas to form the notion of bilateral monopoly, where there is one seller and one buyer. Step 4: Examine the answer options and identify which one explicitly mentions a single seller and a single buyer. Step 5: Recognise that an option with many buyers or many sellers describes competitive or oligopoly situations, not bilateral monopoly. Step 6: Choose the option that states a single seller faces a single buyer in the market.

Verification / Alternative check:
To verify, consider a simplified labour market example. Imagine a mining town where there is only one big mining company that hires workers and only one union that supplies all the labour. The mining company is effectively a monopsonist buyer of labour, and the union acts like a monopolist seller of labour services. Wages and employment are not determined by a competitive supply and demand intersection but by bargaining between these two powerful parties. This situation is a classic example of bilateral monopoly. It clearly involves one seller side and one buyer side with market power, confirming the correct definition used in the answer option.

Why Other Options Are Wrong:
The option that describes many sellers facing a single large buyer corresponds to a monopsony with competitive sellers, not a bilateral monopoly. The option with a single seller and many buyers is a pure monopoly, again not bilateral. The option with many buyers and many sellers is the standard competitive market model. The option about two equal sized firms colluding in an oligopoly is closer to a duopoly or collusive oligopoly, not a bilateral monopoly. None of these capture the combination of a monopoly seller and a monopsony buyer that defines bilateral monopoly.

Common Pitfalls:
Students often focus on the word bilateral and think it implies simply two firms interacting, regardless of their roles. This can lead them to wrongly choose an option with two colluding firms or a duopoly example. Another pitfall is to think that any powerful buyer or powerful seller alone is enough, forgetting that bilateral monopoly requires power on both sides. To avoid these errors, remember that the term is built from monopoly and monopsony, and you must have one of each in the same market. Visualising a single buyer bargaining with a single seller can help fix the concept in your memory.

Final Answer:
A bilateral monopoly exists when a single seller (monopoly) faces a single buyer (monopsony) in a market, and price and quantity are determined through negotiation rather than pure competition.