Bargaining is a form of the distributive negotiation process that happens between buyer and seller to debate and agree upon the price and nature of a transaction. The transactions take place only when the bargaining terms are agreed upon. This process is an alternative pricing strategy to fixed prices. The primary purpose of bargaining is not to create value but to focus on negotiators claiming value.
What is Bargaining?
Definition: Bargaining is defined as the process where a buyer and seller negotiates on the price and exact nature of a transaction. Usually, bargaining revolves around a single issue which is generally price. Bargaining allows the price discrimination strategy, which increases the consumer surplus.
In economics, price discrimination strategy means a situation where a seller sells a product at a price different to every buyer. Bargaining is not so common in the retail sector as most sellers have turned to a fixed price strategy. But, in the case of expensive goods like automobiles, bargaining is expected.
The associated term collective bargaining is also important when it comes to organizational or business management in which a negotiation between employers and a group of employees occurs for finalizing agreements to regulate working salaries, benefits, working conditions, and other aspects of employees’ rights and compensation. Representatives of the trade unions to which employees belong present the interest of the employees in front of the employers.
We will discuss collective bargaining later, let us first delve into the world of bargaining-
Impact of Bargaining due to Cultural difference
Bargaining is done all around the world. However, the nature of the bargaining is often affected due to the regional customs and culture.
Bargaining is limited in North America and Europe. People can only haggle the price of an expensive or limited edition product, for instance, antiques, jewelry, art, etc. In flea markets and garage sales, people are allowed to bargain on the range of products.
In most Asian countries, bargaining is done on products and services from street markets to even hotels. The exposure to bargaining has even made the children learn this art from a young age. Haggling can be a bit aggressive in Asian countries, depending on the specific condition.
However, in Thailand, haggling is meek as natives tend to be humble. Bargaining for food items is highly discouraged in Southeast Asian countries as it is considered an insult.
In middle eastern countries, haggling is considered to be an ‘art’. Almost all the shops in Israel opens up an opportunity for bargaining. The longer time one spends on haggling a product, and the more likely will the buyer would be able to reap the benefit. Often people who are in a hurry get exploited by the seller. The long-term trading relationship is considered very valuable and is good if one wants to purchase goods at a low value.
How is Bargaining Different from Negotiation?
Bargaining is the process of negotiating the terms and conditions of any transaction between a buyer and a seller. It always majorly involves money-related factors. And often, one can find himself in an informal situation when one is involved in doing bargaining. Hence one should be apt in having verbal skills.
Bargaining is all about winning as it is aimed at reaping benefits that can only be achieved by either of the two parties involved. It more like a debate rather than communicating the need.
Whereas negotiation is a discussion that is initiated to reach a particular mutual agreement among all the parties involved. It involves factors other than money; it is generally applied in a legal situation where the parties involved want to reach an agreement. Hence it is aimed at reaching the desired result making negotiation a sensible and formal means of communication.
Theories of Bargaining
There are some theories associated with bargaining, which include the following:
1. Behavioral Theory
The behavioral theory of bargaining emphasizes that the type of personalities in the bargaining process and its outcome. In behavioral theory, primarily, the distinction stays between hard-liners and soft-liners. Hard-liners are generally warriors, while soft-liners are generally shopkeepers. This completely varies from region to region. The bargaining process may take place more in rural areas than in urban areas.
2. Game Theory
In the game theory of bargaining or bargaining games, it refers to a situation where two or more players need to reach an agreement that will decide how to distribute an object or the amount. In these games, every player tries to reach an agreement rather than avoiding it. Every player in the bargaining game favors their interests. In this process, players bargain for the objective as a whole.
The examples under this theory can be:
- When a union of workers negotiates with the directors of the company for increasing the wages of the workers
- Dispute between two communities for the distribution of territory
- Conditions where the two countries agree upon nuclear disarmament
These kinds of situation are analyzed and look for a solution that specifies that which component in dispute corresponds to each party involved in the process.
3. Processual Theory
The processual theory provides an overview of the distinctive elements in the bargaining chronology that can help in better understanding the complexity of the bargaining process. The key features of this theory consist of bargaining range, security point, and critical risk.
4. Integrative Theory
Integrative bargaining is a process of negotiation where the two parties involved in the bargaining process tries to reach a win-win situation. The win-win situation means that the agreement must be beneficial for both the parties and satisfy their interests. These interests may include the needs, desires, concerns, and fears important to each side.
5. Narrative Theory
In the narrative theory of bargaining, getting an outcome is to be narrative rather than economical. This approach is very different from others in terms of conceptualizing bargaining.
6. Automated Bargaining:
In the condition of complex bargaining, it isn’t easy to find the Nash equilibrium using game theory. Therefore, evolutionary computation methods are then designed for automated bargaining. These methods demonstrate an efficient and effective way of approximating Nash equilibrium.
7. Bargaining and posted prices
Generally, retailers allow to bargaining and choose to sell at the posted prices. The bargaining strategy helps these retailers to have price discrimination between different types of customers. Here, the motive of the retailers is not to exploit the buyer after entering the retail store.
Now, the time has come to dive deep into the world of collective bargaining and understand why it is considered highly important in organizational management-
Concept of Collective Bargaining
When it comes to the corporate world, bargaining also exists there but in collective bargaining. Collective bargaining is the process of negotiation between the representative of workers and employers to establish the conditions of employment. After which the collective agreements formulated after these negotiations usually take place for wage scales, working hours, training, health and safety, overtime, grievance mechanisms, and rights to participate in the company’s affairs.
The representative of workers or the union negotiates these terms with a single employer or group of businesses, as per the case, to have an industry-wide reach agreement. These kinds of collective agreements are not so popular in developing countries that have large labor populations. In many countries, collective bargaining is not legally binding. For instance,
1. In Britain, the application of collective bargaining depends on the goodwill of the signatories.
2. In some countries like Germany, France, and Australia, the government requires that negotiated settlements be extended to all firms in that industry.
3. In United States, the negotiation of a new agreement sets a pattern for other labor contracts in the same industry.
History of Collective Bargaining
The collective bargaining term was used by Beatrice Webb for the first time in 1891. He was the founder of the field of industrial relations in Britain.
In the USA, as per the National Labor Relations Act of 1935, it was illegal for employers to deny union rights to an employee. In the year 1962, President John F. Kennedy came up with an executive order granting federal employees the right to unionize.
5 Steps of Collective Bargaining
The process of collective bargaining is generally finalized by the research and analysis done by the trade unions.
Employees may pay a relatively small fee to the trade unions each month as a member and in return, trade unions have a negotiation team for bargaining on the behalf of the employees as per the international standard of bargaining rights to make better economic agreements for the employees. Let us go through all the steps of collective bargaining here and now-
1. Preparing for Negotiations
It covers several areas that the members of the unions are most concerned with. Preparing for negotiations may incorporate a survey of members or several focus groups. Here trade unions and negotiators would try to find out the key points by which they can proceed further with their negotiations.
2. Propose Key Demands
After finalizing the list of the key items, compiling them into an official document will occur. Once it is done, the document will be passed onto the relevant party/parties sitting at a table to have a joint session for the negotiation of the bargaining rights of the employees. These key items are covered as ‘key demands’.
Now, in the third step, there can be different sit-down meetings, phone calls, or emails whereby the details of a deal and associated costs are discussed. Now, both the parties could debate for leaving out certain parts of the deal or including few other parts for creating a more empowering proposal.
4. Agreement Reached
The fourth step takes the trade union and board of a private company toward the final agreement where some of the more details might also be hammered out to finalize the agreement for creating a workplace culture where the bargaining rights of employees are preserved.
5. Administration of Agreement
At the final stage of collective bargaining, trade unions will use their ability to ensure that employer account and ensure the bargained agreement is being implemented to support the employees.
Types of Collective Bargaining
After understanding the steps through which collective bargaining can be implemented, let us now have a look at different types of collecting bargaining processes-
1. Distributive Bargaining
Distributive bargaining is a competitive bargaining strategy where one party gains the benefit at the expense of the other.
2. Integrative Bargaining
Integrative bargaining is a bargaining strategy in which both parties try to reach a mutual agreement. It involves providing mutual benefits to both the parties involved.
3. Productivity Bargaining
Productivity bargaining involves negotiation between the employees and the organization. The bargaining is aimed at improving productivity in return for the monetary benefits.
4. Composite Bargaining
Composite bargaining involves the use of the bargaining strategy majorly focused on the various elements other than related to money. Negotiation of employee welfare and job security falls under this category. This is aimed to ensure a mutually beneficial relationship between the company and its employee.
5. Concessionary Bargaining
Concessionary bargaining involves the negotiation process in which the employer gains their previous benefits from the union.
Collective Bargaining Rights
We had talked a lot about collective bargaining rights above, let us now understand about it in a more detailed manner.
The National Labor Relations Act offers employees the right to bargain collectively with their employers. For this, employees can choose and hire a representative by forming a union.
This will let the unions and employers bargain in good faith about wages, facilities, hours, and other key terms and conditions of employment by making a contract upon which both the parties will agree.
On the concluding note, it is clear that bargaining is a process of negotiating and finalizing a better price and nature of the transaction when you seek an optimized and improved way of making commercial transactions.
In the same way, collective bargaining offers employees an improved negotiating power against the employer to have an empowering work environment where employees like to engage and do their jobs. It helps employees in making agreements for several areas like wages, workers’ rights, benefits, working conditions, pensions, protecting workers’ jobs, etc.
What are your thoughts about the importance of bargaining in making better deals?
Do you find collective bargaining important to negotiate and improve national labor relations with employers? Share your opinion with us in the comment section below.