ABSTRACT
Perfectly competitive markets are characterized by a large number of buyers and sellers entering into verbal, tacit, and written contracts for the purpose of exchanging goods and services for something of value, usually money. The monetary value of a single unit is its price. Firms in perfectly competitive industries are price takers because they are unable to infl uence the market-clearing price through their individual production decisions. Consumers may similarly be described as price takers because their individual purchasing power is too small to extract better terms from sellers. Theoretically, since neither buyer nor seller has “market power,” the ability to bargain, or “haggle,” over the terms of the contract is nonexistent. By contrast, a profi t-maximizing monopolist sets the price of its product; buyers, having nowhere else to go, can either accept or reject the asking price. They lack the ability to negotiate the terms of the transaction. Even in those instances where neither the buyer nor the seller may be thought of as a “price taker,” such as a monopsonist buying from an oligopolist, economists until recently had little to say about the possibility of negotiating, or bargaining, over the terms of the contract. A contract is a written or oral agreement that obligates the parties to perform, or refrain from performing, a specifi ed act in exchange for some valuable benefi t or consideration.
