Bargaining Power

Bargaining power is the relative ability 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.

Here is a layman's terms example of one party displaying large amounts of bargaining power over the other:

Stephanie is applying for a job at Company, Inc. Only one position is available, and there are 100 different people applying for that same position. Company, Inc. will have a lot of choice, and will be in a position to offer Stephanie a standard form contract for employment, complete with minimum wage pay, nothing but workers compensation and unemployment as benefits, and the possibility for termination at any time, per the doctrine of at-will employment.

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.