A MODEL OF COUNTERTRADE
by
Tore Ellingsen
London School of Economics and Political Science
Discussion Paper
No. EI/3
March 1991
The Toyota Centre
Suntory and Toyota International Centres for
Economics and Related Disciplines
London School of Economics and Political Science
Houghton Street
London WC2A 2AE
Tel.: (020) 7955 6674
I am grateful to Mathias Dewatripont, John Moore, Asa Rosen and John Sutton for helpful
discussions on this topic. Thanks also to seminar participants at the Norwegian School of
Economics and Business Administration, and Bonn University. The work was financed by
NORAS, through the LOS Project, and NAVF. Errors are mine.
Abstract
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.
Keywords: Countertrade, reciprocal buying, two-way transfer of goods, gametheoretic model, rational business strategy, homogeneous goods industries.
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