What is bargaining power?

bargaining power It is the ability of consumers or buyers to have a certain degree of influence over the level of prices that are demanded for various goods or services. The term is also used in employment situations and refers to a potential employee's ability to negotiate better pay and job benefits based on their perceived value to the employer. The degree of bargaining power present will largely depend on the number of options open to consumers, or the number and quality of potential employees competing for the same position.

In an environment where both parties have more or less equal bargaining power, the potential to negotiate a resolution that is acceptable to both parties is often much easier to achieve. If this balance of power is not equal, one party will have a decisive advantage over the other and will be in a much better position to dictate terms. As a result, the party with the least bargaining power often has to settle for less than it wants to receive any benefit from the transaction.

For example, in situations where there are relatively few suppliers of a good or service, and each supplier sells goods at prices very similar to those sold by its competitors, this is seen as an inequality in bargaining power. The consumer has little opportunity to demand lower tariffs, as competitors have set their prices to reflect each other. In this scenario, the consumer has only two real options: pay the prices set by the entities that monopolize the market or give up buying the goods. When these products are considered essentials rather than luxuries, choosing not to make a purchase can be extremely difficult.

At the other extreme, situations where most of the bargaining power rests with consumers can quickly reduce costs to the point where some suppliers are no longer able to provide goods and services and generate sufficient returns to stay in business. As more providers fail, this leaves consumers with little choice and can lead to the creation of a monopoly. At this point, the inequality in bargaining power passes from the consumer to the few remaining suppliers, who can now set prices at a level that guarantees considerable profits, with little fear of new competition in the market.

With employment situations, the degree of bargaining power present depends on the circumstances relevant to the situation. In a small town where two or three employers dominate, potential employees must compete for limited positions that can offer very similar pay from one employer to another, regardless of the talents and skills the employee has to offer. On the other hand, an employee looking for a position in a job market where there are many employers in need of skilled labor is much more likely to seek and receive salaries and benefits designed to attract people who offer the desired skills. Often, the employee may consider several different job offers, selecting the one they believe offers the most benefits.