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Bargaining power is the ability of consumers or buyers to have some degree of influence on the level of prices that are demanded for various goods or services. The term is also used in employment situations, and refers to the ability of a prospective employee to bargain for better employment wages and benefits based on his or her perceived value to the employer. The degree of bargaining power present will depend a great deal on the number of options open to consumers, or the number and quality of prospective employees who are competing for the same position.
In a setting where both parties have more or less equal bargaining power, the potential to negotiate a resolution that is acceptable to both parties is usually much easier to accomplish. Should that balance of power not be equal, one party will have a decided advantage over the other, and be in a much better position to dictate terms. As a result, the party with less bargaining power often has to settle for less than what he or she desires, in order to receive any benefit at all 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 his or her competitors, this is seen as an inequality in bargaining power. The consumer has little opportunity to demand lower rates, since the competitors have set their prices to mirror one another. In this scenario, the consumer has only two real options: pay the prices set by the entities that monopolize the market, or forgo purchasing the goods altogether. When those goods are considered essentials rather than luxuries, choosing not to make a purchase can be extremely difficult.
At the other extreme, situations in which the majority of bargaining power rests with consumers can quickly drive costs down to the point that some suppliers are no longer able to provide goods and services and generate enough return to remain in business. As more suppliers fail, this leaves consumers with few choices, and may ultimately result in the creation of a monopoly. At that point, the inequality in bargaining power shifts from the consumer to the few remaining suppliers, who can now set prices at a level that ensures considerable profits, with little fear of any new competition creeping into 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 are likely to offer compensation that is very similar from one employer to the next, regardless of the talents and abilities that the employee has to offer. In contrast, an employee who is seeking a position in a job market where there are many employers needing qualified labor, stands a much better chance of seeking and receiving wages and benefits that are designed to attract individuals offering the desired abilities. Often, the employee is able to consider several different job offerings, selecting the one that he or she feels offers the most benefits all around.
Hence the reason why competition is considered to be good for consumers. In cases where one company holds a monopoly on all the goods or services in an area, the consumer has little to know bargaining power. A look at the phone industry is a great example of how introducing competition made things better for consumers. Back when "Ma Bell" was the only game in town, long distance and local rates were pretty well decided by whatever the phone company decided they should be.
After the telecommunications industry was deregulated, rates dropped considerably for consumers and laid the foundation for competition in lower prices in new technologies such as cell phones, Internet service, etc.