PVBP: Parity Vector of Bargaining Power

Abstract

The Theory: This is an upgrade to the Theory of well-known French-Italian sociologist, economist, and philosopher Vilfredo Federico Damaso Pareto (1848-1923). The main objectives: PVBP: Parity Vector of Bargaining Power is a set of possible agreements. The start point of the vector locates PI (Pareto Inefficient) and walking on the vector toward Efficient Frontier we will get closer to the PO (Pareto Optimum). Applying formula the Purchaser or Supplier could find Pareto Optimum in advance before to sit on negotiation. Further more the computer software could offer you PO instantly. The seller's job then would be only to put the price and quantity into proposal and to make the first (anchor) offer. Well calculated the offer sooner or later will be accepted by the buyer. Of course I do not underestimate the negotiation skills rather to give guideline for faster conclusion of the contract. All Purchasers and Suppliers are familiar with the Market Power of the counterpart. As much power the counterpart has as much concessions you will do. Thus explains why negotiating with Monopoly left you only choice to get their favour or to accept monopoly offer as-is. The formula proves that if the angle PVBP° > 90° than you are in a state of inferiority or monopoly and only successful strategy is to get counterpart's favour. It also could explain the phenomenon of corruption in order to ensure that favour. PVBP°= 90° * (Supplier market power) / (Buyer Market Power) Where, Supplier market power = Supplier share on its particular market segment (in percentage); Buyer market power = Buyer share on its particular market segment (in percentage). N.B. the buyer market segment and the supplier market segments could differ. For example: Your company is distributor of XYZ Ltd. natural juices producer. You did 1.0 MEUR turnover this year on a market of 10 MEUR. The supplier XYZ Ltd. did total turnover of 5 MEUR for the same period on a market of 80 MEUR. Therefore Buyer market power = 1/10=10% and Supplier market power = 5/80 = 6.25%. The result is PVBP°= 90° * 6.25/10 = 56.25° therefore you have Positive Negotiation Leverage. Once you have the angle you can find the proper price on correspondent quantity (see the diagram at the end). All results in a range between 1°-90° gives the buyer Positive Leverage and therefore is worth to buy from this supplier. All results higher then 90° gives Negative Leverage to the buyer and therefore is not recommended to buy from this supplier. Of course if the supplier is not presented on your particular market but would like, therefore it is a question of strategic expansion than your positive leverage could vary. The point A represents the maximum quantity that the Buyer is capable to sell and point B represents the lowest (walk-away) price of the supplier (see the diagram at the end). Benefits: 1. You have a tool for fast selection of the best suppliers; 2. You can offer the PO on the first meeting therefore save precious time and efforts. Implications: Effective: At no-monopoly market Ineffective: Monopoly environment Broad Implication: All economy sectors but most efficient in FMCG sector.