1989/04/01 by Roger D. Blair, David L. Kaserman, Richard Romano +1
Economics, Econometrics and Finance · Decision Sciences · #Game Theory and Voting Systems #Economic theories and models #Auction Theory and Applications
paper · doi:10.2307/1059465
Most economists are familiar with the concept of bilateral monopoly: an upstream monopolist sells its output to a single downstream buyer that may also be a monopolist in its output market. The theory of bilateral monopoly has a rich history that can be traced to the writings of Cournot [10] and Menger [31].' Over the 150 or so years that the problem has been under consideration, however, economists have offered a variety of solutions ranging from a completely determinate intermediate good price and output to a completely indeterminate solution within a specified range. Interestingly, this historical divergence of opinion concerning the correct outcome under bilateral monopoly still persists. A clear consensus has not yet emerged. Surprisingly, this lack of unanimity exists despite the fact that Bowley [5] provided the theoretically correct solution in 1928.2 Even more surprising, however, is the apparent popularity of the incorrect solution. A recent survey of the population of intermediate microeconomic texts on the authors' bookshelves revealed that over 80 percent of the current treatments of this topic are in error.3 Table I presents the results of that survey. Those authors who present a correct analysis of bilateral monopoly recognize that optimality requires joint profit maximization. This leads them to the correct conclusion regarding the determinate quantity of the intermediate product exchanged. Of the five treatments we have classified