This paper analyses the impact of royalties in the context of a bilateral monopoly bargaining process. It is shown that the bilateral monopoly model is characterised by two distinct forms which are distinguished by the shape of the seller’s marginal cost function, and that the view that royalties have a disincentive effect on production is unfounded for one of these forms. It is argued that the forms of bilateral monopoly can be differentiated by identifying the direction of the observed correlation between movements in traded prices and quantities. This proposal is investigated in the context of the Australian iron ore and coal industries, and it is suggested that, in the case of iron ore, royalties do not have a disincentive effect on production.