Draw a bilateral monopoly and show the range in which the wage settles
6 min
4 questions
Key terms
Bilateral monopoly
A bilateral monopoly is a labour market with a monopsony employer on the demand side and a trade union on the supply side.
Monopsony
A monopsony is a labour market with only one employer, which faces the whole supply curve of labour and chooses the wage.
The wage range under bilateral monopoly
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The employer's choiceThe monopsony hires L1, where MCL meets MRP, and pays Wm, read down to the supply curve S.
With employment at L1, the wage can go up from the monopsony's Wm to the union's target Wu; bargaining power decides where it settles.
The monopsony hires L1, where the marginal cost of labour equals the marginal revenue product, and pays Wm, the lowest wage the supply curve allows for L1 workers.
The union, the only seller of this labour, aims for Wu, the marginal revenue product of the L1th worker: the highest wage at which the employer still wants all L1 workers.
The diagram does not fix the wage. It settles closer to Wu the more bargaining power the union has and closer to Wm the more the employer has. If employment stays at L1, it is below the competitive level L2.