An econometric analysis of the bilateral monopoly model

This paper develops a theoretically consistent econometric technique which models the bargaining environment and the determination of price and quantity transacted in a market dominated by a single seller and buyer. The generalised Nash bargaining framework and limited dependent variable econometric techniques are integrated to achieve this end. Besides exogenous shifters, only data on price and quantity transacted are needed to model unobserved bargaining limits, bargaining strengths and outcome profits/surpluses. The coking coal trade between Japan and Australia is analysed to illustrate the technique. Based on either a profit or surplus measure of the gains from trade, Australia's division of the gains from trade is predicted to have increased significantly over time.