The Weakening of Bargaining Power

Venezuela is worried. Scarcity of basic items have caused consumers to queue in front of convenience stores overnight to buy milk. Hugo Chavez’s socialist ideals seem to have floundered as the social hierarchy unravels with the poorer waiting and the richer satiated. Many blame the corrupt government for siphoning money away from social services; others blame the drastic reduction of the oil price. The anchor of the Venezuelan economy has been oil, and diversifying away was never strongly encouraged, leaving the South American nation a dependent state.

It would be mistaken to think that there is one reason for the crisis in Venezuela. Corruption and decreasing oil prices have all contributed to the problem. One cannot say that Venezuela would still be suffering if the oil prices had stayed over $100 and corruption remained; none of these issues are mutually exclusive. Indeed, the economic success and sustenance of any nation is multifaceted and dependent on both internal forces (politics, commercialism, cultural philosophy, etc) as well as external (remittances, sanctions, oil prices, etc). A ruler has to be concerned with both.

Even so, the complexity of modern day markets, the intertwinement of systems, the ripple-effect ramifications of the actions of foreign nations means that nations can no longer look inside for sustenance and growth (unless you are North Korea, but as the recent Hollywood debacle has shown, they are far from being out in the cold). OPEC has shown that with reducing prices to increase supply, countries can be affected in different ways. While the US and Saudi Arabia may be lighting up a cigar with a smile on their blackened faces, Venezuela and Iran are wiping their brow.  We do not seem to live in a United Nations world.

In theory when countries trade with each other, they are making themselves better off (both countries are getting what they want).  It is the case of the market forces acting in favor of both parties. Yet this is not always the case. The bargaining power of one nation or one company can be far greater than the other, placing them in the position to dictate prices. The more powerful, in the end, have a greater say in how a transaction should effectively take place.

Thus the markets are not so benign as the theory of perfectly competitive markets would aspire for, and neither does the invisible hand exercise the best outcome where we reach market equilibrium. It is assumed that demand will meet supply where both parties are happy with the quantity sold and the price for each unit. This notion is weakened the greater disparity in bargaining power.  We see this both in the goods and the labour market and more often than not these markets intertwine.

As an example, a major brand in West wish to sell shirts. The brand shops around and finds a Bangladesh garment factory that is offering to sell shirts for the lowest cost. Higher management of the brand go to Bangladesh, accept the quality to be reasonable, and offer the contract to the garment factory. The brand can now buy at a cheaper cost but sell at a higher price. That latter price might be at a correct market price as the brand has to rely on the consumers to buy and the higher the price, the less the demand. In Bangladesh, however, the garment factory owner is thinking he wants a lot of money too. He has the luxury to push down wages to such a point as the workers are happy although not comfortable. Now one could argue that this is a market wage, yet cut the share of the profits going to the garment factory owner and transfer it to the workers wage, market wages go up.

Thus the bargaining power of the brand is higher with the garment factory, and the bargaining power of the owner is higher than his worker. Those with stronger bargaining powers can dictate terms manipulating the needs of their transactional partner. Recently in the UK, the Think Tank Civitatis was found to charge their unpaid interns 300 pounds for a reference. A graduate looking to climb the career ladder and finding options in today’s economy to be limited would begrudgingly pay (if he had the money). Civitatis would argue we are offering them a benefit, and they should pay. All that is happening is a manipulation of bargaining power.

Would we call these examples as milder forms of oppression? Many would disagree arguing that the weaker party is getting a benefit he otherwise would not have. Furthermore, by working he has the opportunity to rise out the mire of his own poverty and be able to strengthen his own bargaining power. This is a curious argument, yet one that development economists hear when explaining growth in nations. The developed world was once a drudgery with inequality far greater than today. The UK and US lived with stark class tensions with the working classes toiling while the upper classes reaped the rewards. Yet wealth trickled down changing society in remarkable ways.

One could argue this was due to the market. However, this is too simple and general an assumption. Certainly the market led to better distribution, but more importantly, it was the values of market participants that led beneficial changes. Here we are not talking about just the buyer and seller; we are talking about society in general with members invested in the distribution of social benefits. The notion of a social welfare state rests upon a polity that is looking out for their own.

The market, therefore, cannot be considered in isolation. Every market agent is member of society, and if society is to be utilitarian then the market has to be too, that is happiness for the greatest amount of people.  However, the more parochial and selfish the market participant then the likelihood is society will suffer its consequent ignominies. This is worrying if one simply considers the domestic market; it becomes are far greater concern if we increase the number of players as happens with the international market thus meaning an agent with greater bargaining power in one country can dictate the terms for his transactional party in another country who then dictates his terms to a weaker party in his own country.

In Venezuela, the above principle is manifest, as OPEC reduces its prices. Venezuela accepts the terms of lower oil prices. Corruption means the profits available go to a select few, who perhaps pay for more luxury items meaning money does not get into the domestic economy sufficiently. There is more to this story, but when we strip to the layers of complexity the basic lesson is that the greater disparity in bargaining power and the more self interested, the less likely the invisible hand will be successful as our free market proponents believe.  The values of market participants are central to understanding the markets irrespective of the laws that seek to restrain vices. But this is a story for another day.

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