How To Haggle And To Stay Firm: Barter As Hidden Price Discrimination

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Economic Inquiry


Estimates indicate that growing numbers of US corporations are engaging in barter transactions. This growth could be difficult to explain, given valuation at market prices, the absence of tax advantages, and costs associated with in-kind payments. One explanation is that barter can be of mutual interest to 2 parties by enabling both to practice price discrimination, the effective terms of which are hidden from all other economic agents. Since the open use of 2 or more prices might be costly for firms, they have an incentive to conceal price discrimination. A situation in which 2 firms obtain production inputs in the exchange is a prototypal transaction within barter clubs. An analysis of such a transaction indicates that, if a firm has an opportunity to price discriminate and hide that discrimination, it will do so. A formal model identifies conditions under which firms choose to price discriminate through barter and indicates the types of industries and firms that are likely to barter.