Bilateral monopoly exists when one buyer faces one seller. We shall take barter between two parties as our prototype of this market structure. Let us suppose that (a) ‘A has … a basket of apples, B a basket of nuts’, and that ‘A wants some nuts, B wants some apples’;1 (b) all A’s apples, and all B’s nuts, are homogeneous; (c) we are given the indifference maps of A and B; and (d) each party seeks to maximise his satisfaction. The consequences of these assumptions are illustrated in Figure 17.0.1. A’s indifference map is drawn in diagram (a) and this shows A’s tastes for apples and nuts and his preferences as between different combinations of them. A’s basket contains OR apples, and the indifference curve A o on which R lies divides all combinations of nuts and apples which A would prefer to OR apples from those he would deem less attractive. Similarly, the indifference curve B o in diagram (b) illustrates B’s bargaining limit, for he will not trade with A unless it leads to a combination of nuts and apples which he prefers to any combination lying on B o . In diagram (c), B’s indifference map, after having been rotated anti-clockwise through 180°, is superimposed on A’s: OZ (= OR) shows the number of apples in A’s basket and O′Z (= OS) the number of nuts in B’s basket. A and B will only be willing to trade with one another if as a result of trade each is left with a combination of nuts and apples that lies within the area bounded by A o and B o in diagram (c).
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