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Abstract:

Economics of Industry Paper
A Model of Countertrade
Tore Ellingsen
March 1991
Paper No' EI 03:
Full Paper (pdf)

Tags: countertrade; reciprocal buying; two-way transfer of goods; game-theoretic model; rational business strategy; homogeneous goods industries.

Countertrade - or reciprocal buying - is defined as a transaction involving (at least) a two-way transfer of goods, rather than a singular transfer of goods for money. The main objective of this paper is to explain the extensive use of countertrade both between countries and between firms within one country. In a simple game-theoretic model it is shown that countertrade may be a rational business strategy for firms with buying power, and that the impact on welfare is negative, even in the case where no firm exists. The model is consistent with the observations that countertrade occurs mainly in homogeneous goods industries, that trades are relatively balanced and that the practice is more widespread during recessions than during booms.