Bargaining power

Bargaining power is a concept related to the relative abilities of parties in a situation to exert influence over each other. If both parties are on an equal footing in a debate, then they will have equal bargaining power, such as in a perfectly competitive market, or between an evenly matched monopoly and monopsony.

There are a number of fields where the concept of bargaining power has proven crucial to coherent analysis: game theory, labour economics, collective bargaining arrangements, diplomatic negotiations, settlement of litigation, the price of insurance, and any negotiation in general.

Bargaining power is often expressed as a ratio of a party's ability to influence the other participant, to the costs of not reaching an agreement to that party.

BP_A(Bargaining Power of A) = (Benefits and Costs that can be inflicted upon B)/(A's cost of not agreeing)

BP_B(Bargaining Power of B) = (Benefits and Costs that can be inflicted upon A)/(B's cost of not agreeing)

If BP_A is greater than BP_B, then A has greater Bargaining Power than B, and the resulting agreement will tend to favor A. The reverse is expected if B has greater bargaining power instead.

This formulation and more complex versions with more precisely defined variables have been utilised to describe the behavior of parties to a negotiation and determine where their behavior will fall within the possible options they might agree to. Even in a situation of seeming equality there may be underlying factors that more complex models of bargaining power attempt to include.

See also

Bargaining

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