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Trade and Linked Exchange; Price Discrimination Through Transaction Bundling

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  • Dassiou Xeni

    ()
    (City University)

  • Choi Chong Ju

    ()
    (Australian National University)

  • Maldoom Dan

    ()
    (dan.maldoom@dotecon.com)

Abstract

In this paper we try to explain how price discrimination can cause bilateral trade patterns of the type seen under countertrade agreements. We interpret countertrade as a form of transaction bundling, which can discriminate between potential trading partners, and we combine characteristics from two explanations as to the existence of countertrade: Price discrimination through transaction bundling, and adverse selection arising from the uncertainty in the quality of the goods produced by trading partners in a less developed country (LDC) leading to a partner preference from the side of the Western (DC) firm. Our paper shows that the trade volume prospects of a firm in a LDC can be considerably enhanced if a countertrade transaction is bundled, and that such gains in trade become greater (relative to the case of no bundling), the greater the degree of quality uncertainty in the good it sells. It is also shown that it is profit maximising for a firm in a DC to offer mixed bundling for the exchange transaction, and that the profits derived from such bundling are a decreasing function of both the degree of uncertainty in the good sold by the firm in the LDC, and the marginal cost of the good sold by firm in the DC.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 4 (2004)
Issue (Month): 1 (May)
Pages: 1-17

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Handle: RePEc:bpj:bejtec:v:topics.4:y:2004:i:1:n:3

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  1. Dalia Marin & Monika Schnitzer, 2002. "The Economic Institution Of International Barter," Economic Journal, Royal Economic Society, vol. 112(479), pages 293-316, April.
  2. Caves, Richard E. & Marin, Dalia, 1992. "Countertrade transactions: theory and evidence," Munich Reprints in Economics 19952, University of Munich, Department of Economics.
  3. Choi, Chong J. & Maldoom, Daniel, 1992. "A simple model of buybacks," Economics Letters, Elsevier, vol. 40(1), pages 77-82, September.
  4. McAfee, R Preston & McMillan, John & Whinston, Michael D, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 371-83, May.
  5. Marin, Dalia & Schnitzer, Monika, 1995. "Tying Trade Flows: A Theory of Countertrade with Evidence," American Economic Review, American Economic Association, vol. 85(5), pages 1047-64, December.
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Cited by:
  1. Dassiou, Xeni & Glycopantis, Dionysius, 2008. "Price discrimination through transactions bundling: The case of monopsony," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 672-681, July.

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