Inequality of bargaining power

In law, economics and the social sciences, inequality of bargaining power is where one party to a "bargain", contract or agreement, has more and better alternatives than the other party. This results in one party having greater "power" than the other to choose not to take the deal and makes it more likely that this party will gain more favourable terms. Inequality of bargaining power is where freedom of contract ceases to be real freedom, or where some have more freedom than others, and markets fail.

Where bargaining power is persistently unequal, the concept of inequality of bargaining power serves as a justification for the implication of mandatory terms into contracts by law, or the non-enforcement of a contract by the courts.

The concept of inequality of bargaining power was long recognised, particularly with regard to workers. In the Wealth of Nations Adam Smith wrote,

Beatrice Webb and Sidney Webb in their treatise Industrial Democracy significantly expanded on the critique of 19th century labour conditions and advocated a comprehensive system of labour law contained a chapter called, "The Higgling of the Market". They argued that the labour market was dominated by employers, and therefore had the same effect as monopsony. Workers generally are more under pressure to sell their labour than an employer is under to buy it. An employer can hold out longer, because typically he will have greater financial reserves. This means that much labour is supplied merely out of necessity, than free choice (shifting the supply curve to the right) and it is a false kind of competitive environment. The Webbs also pointed out that discrimination can decrease job opportunities for women or minorities, and that the legal institutions underpinning the market were skewed in favour of employers. Most importantly, they believed that a large pool of unemployed people was a constant downward drag on the ability of workers to bargain for better conditions.

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