Bargaining Power

We find it argued by those who favor greater government control that trade exchanges are frequently imbalanced, that one side of the trade gets a better deal than the other. This exploitation is caused by one side’s “bargaining power” being greater than the other. Thus it is argued that, in order to maintain proper trade balance, government must intervene to equalize bargaining power.

It makes sense. Almost all trades, in fact, are not entirely 1 for 1 in trade value. One person gets a better deal than the person they traded with. Yet they make the trade anyway. Why? Because they are getting more value from the trade. Just because one person is coming out more ahead than the other doesn’t mean they don’t both come out ahead. Otherwise no trade would occur.

But with that said, let’s explore the concept of “bargaining power” a little further. The idea is that one party has greater leverage in the deal, thus having power to skew the deal away from its perfect equilibrium towards a better bargain for the one party. First, let’s dispel with the notion of perfect equilibrium. There is no such thing. In each individual trade, the values on both sides of the trade are inherently unequal. No two people value any one item or service exactly the same, let alone two. Thus the real values in the trade are in the eye of the beholder. So trade is never equal. But each trade is such that both parties are richer because of it. It can be argued that there is an equilibrium in a macroeconomic sense, that the overall market can find its balance, which point is generally indicated by price. This is only true as a conceptual value, as the macroeconomic value is simply the average of all individual trades. You can’t assign a value to a trade between producing society and consuming society, as these entities are conceptual and imaginary, and not an actual representation of any one trade. No one individual trade will match the macroeconomic average of values. So it is silly to argue for government to chase an imaginary target through regulation.

Now, let’s address the idea of leverage. If one party has leverage, he may be able to achieve a better deal in a trade than otherwise. But what is this leverage? How does he get it? Most leverage is caused by an undersupply. If there is a shortage of supply, and the item in demand is hard to get, the seller has leverage to charge more than the item would normally cost if supply met the demand. This “price gouging”, however, is not an exercise in exploitation. It is, rather, a natural and correct reaction of the market to match supply with demand. If the supply is short, we must reduce the demand in order to match it. This is done by increasing the price. If we don’t, the demand stays much higher than the supply. If this is the case, it becomes a matter of first come first served until the supply is gone. In this scenario, those who want or need the item the most don’t necessarily obtain it. It is a poor distribution mechanism, and doesn’t maximize the trade value for the supplier. It’s a lose-lose. We must let prices adjust to balance the supply with demand. This isn’t leverage, it’s a market adjustment.

What else can be used as leverage? Time? In some cases, prompt supply can be a factor. If you need an item now, you have to find a supplier that has been holding supply of the item for such a case. This leverage can also lead to paying higher prices. However, this is again a market adjustment, as a middleman is holding a product at his own expense, for your convenience of purchasing the product whenever you need it. If you don’t have time restrictions, you don’t need to pay for the convenience of the middleman.

Leverage of force or intimidation is illegal, as it should be. Fraud also.

There is no legal “bargaining power” that is not market caused and good for the market. It’s a myth. Sometimes it’s good for some people to be unable to afford something. Prices have to adjust demand so that resources get allocated to the people who need it most. If we try to “fix” the problem, we instead throw the market out of balance, and cause the problems we are becoming accustomed to from our government. Thanks Uncle Sam.