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.

Several formulations of bargaining power have been devised. A popular one from 1951 and due to American economist Neil W. Chamberlain is:

In another formulation, bargaining power is 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:

These formulations and more complex models with more precisely defined variables are used to predict the probability of observing a certain outcome from a range of outcomes based on the parties' characteristics and behavior before and after the negotiation. One potential application is in patent infringement lawsuits, when the jury must determine for the patent holder and the potential licensee a mutually-agreeable royalty for use of the patent holder's proprietary technology. One economist suggests a methodology to calculate the royalty whereby the total surplus of the transaction (or, the gains from trade generated when the patent holder successfully licenses its technology to the licensee) is calculated first, then split among the negotiating parties based on, in part, their relative bargaining power. The model explains that a patent holder with more bargaining power—for example, a patent holder that licenses its patents on an exclusive basis or that owns a commercially-successful technology—would capture a larger share of the total surplus than the licensee, and vice versa, as well as shows how that insight could guide a court's determination of a reasonable royalty in a patent infringement lawsuit.

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