Professor Fellner's Bilateral Monopoly Theory

Abstract

Professor Fellner distinguishes three basic adjustments under bilateral monopoly: 1) If the buyer dominates the relationship, he will equate his marginal value product (marginal product times the price of the product) with a function that is marginal to the seller's marginal cost.2 This adjustment is shown in Figure 1, where the function marginal to the seller's marginal cost is designated by the symbol MMC, and MVP represents the buyer's marginal value product. Since the buyer is dominant, he establishes a price along the seller's marginal cost curve, (MC in Figure 1), the result in this instance being the price Q2P2. The quantity exchanged is represented by the segment OQ2 . 2) If the seller dominates the relationship, he will equate his marginal cost and a function that is marginal to the buyer's marginal value product.3 This latter function is represented by the symbol MMVP in Figure 1. Since the seller is dominant, he will select a price along the buyer's marginal value product curve. The appropriate price in the example represented in Figure 1 is represented by Q1P1, and the quantity exchanged by OQ1. 3) If the firms are presumably of more equal strength, they will exchange the quantity that will maximize joint profits (marginal costs equated with marginal value product) at a price determined by their relative skill and power.4 The final price will lie within the limits of the average cost and average value product functions (designated by AC and AVP respectively in Figure 1), or within the range P3 P4 shown in Figure 1. These adjustments require that at least one of the entrepreneurs (the leader) have knowledge of the pertinent functions in both firms. If the seller is dominant, he chooses a price that is most favorable to him in light of the buyer's revenue functions, and under the assumption that the buyer may purchase any quantity he wishes at the price established by the seller. It is because the weaker entrepreneur, the buyer, has the power to equate his marginal value product and