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Bartering: food for thought with value creation


Wall Street Journal’s Raymund Flandez reports on businesses beating the recession through barter.

In return, Bureau Blank is helping Mr. Hunt shape his company’s communications strategy, as well as designing the company’s logo and Web site.

“It’s a result of the economy being a lot tougher now,” says Mr. Blank, who estimates the traded work amounts to about $10,000 worth of services.

He adds: “I wouldn’t have done the project if I had to pay the cash.”…

Atlanta Refrigeration Service Co. worked out a deal with a local sandwich shop that was 90 days overdue on a $1,500 bill: The sandwich shop paid $500 and agreed to cater lunch to Atlanta Refrigeration’s office five times over the next six months.

Bartering is “critical to us in this recession,” says Dave Brautigan, chief operating officer of the Atlanta-based refrigeration company. “As more and more of our clients find themselves in positions where they cannot pay the bill in full, it becomes our responsibility to figure out how to get that money in.”

What does the GDP tell us about these transactions? They are bad for business. Transactions that are not paid in cash won’t be reflected in statistical measures, for the same reason that favors and work done in the household are not counted. Value creation analysis gives a much better measure of the role that barter transactions play in the economic recovery–transactions that won’t be counted when economic historians assess the timing of the recovery.

GDP can’t measure the value of the transaction to either party, except in so far as the price is concerned. Most parties of most transactions, most of the time, actually derive more value from the transaction than the price suggests. Businesses derive a proft from providing services that are more valuable (gross revenue) than their costs (expenses). Consumers get more value from goods and services than they pay for them. In fact, one of the principal arguments against monopolies is that the monopolist’s profits come at the expense of consumer surplus.

Barter transactions are an exceptional case for value creation analysis. To see the marginal value of the transaction to the supplier and the customer, we can value the barter transaction against the best substitutes that businesses would otherwise have been able to obtain. Recall value creation analysis seeks to measure the customer’s willingness to pay and the supplier’s opportunity cost. Firms generally sell things for which the customer’s willingness to pay is greater than the firm’s opportunity cost. As a lower bound approximation for willingness to pay, the customer is willing to pay at least market price for a service of equal value. If goods and services are customized, specialized or differentiated, then the true value may be much higher than that.

Competitive dynamics are present too. The party to a barter contract that cannot pay cash knows that the failure to pay cash is an inconvenience. Therefore the party that suggests a barter may offer a greater quantity or quality of service as payment than would be a customary cash equivalent. Rather than being bad for the economy, bartering may be quite good for the economy. Without any cash changing hands, firms may find it expedient to provide greater value to customers than they would in a cash economy.

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About Ben Mazzotta

Ben Mazzotta is a postdoc at the Center for Emerging Market Enterprises (CEME). His study of the Cost of Cash is part of CEME's research into inclusive growth.

Discussion

4 thoughts on “Bartering: food for thought with value creation

  1. “Transactions that are not paid in cash won’t be reflected in statistical measures, for the same reason that favors and work done in the household are not counted.”

    There is one key difference here between businesses bartering and simple favors: B2B barter whether privately transacted or via a barter exchange network using trade dollars are taxable. So there is a means for measuring them, unlike simple gift economy favors..

    The IRS and state tax departments LOVE barter as long as you pay the taxes on it. (And really if you’re talking about it to the press you sure as heck better claim it on your return.)

    So yes I agree we’ve got real value creation here but we also have the means to track and measure it. So there’s no reason it can’t be counted toward GDP. Am I correct? If not please enlighten me.

    Posted by Trish | July 17, 2009, 11:50 am
    • Trish, thanks for the insightful comments! I don’t think I share your optimism about how carefully barter transactions are reported to the tax man, but I sincerely hope you are right and I am wrong.
      The main point I hoped to raise was that the surveys the federal government uses to capture this information, while they are legally binding, don’t measure these barter transactions. Even if they do, they might be reporting them so as to report items at cost, rather than at retail value, which would tend to understate the value of the transactions.
      Hope to hear from you again-

      Posted by Ben Mazzotta | July 29, 2009, 7:17 am
      • My pleasure Ben,
        They actually don’t have a choice. Any reputable BEN (Barter Exchange Network) collects your Tax ID number before they’ll open an account for you. No tax ID – no account and no transactions through them.
        Take a look at any of the applications. Now 1 to 1 barter between two business people transacted outside a BEN (Barter Exchange Network) can easily, and often go unreported. But if they get caught…
        The thing is trading through a BEN is tons more flexible cause they use a virtual currency to make trades. What that does is alleviate the need for two people to have just what the other one needs.
        A BEN allows you to split the buy and sell parts of the trade so you trade-sell to one business and trade-buy with anyone else with the barter dollars garnered from the trade-sell. Big, big difference and gives you way more variety.
        And yes it’s usually full ‘retail’ value. Cause you only get paid (in trade dollars) for what you sell. You can discount your sell if you want but then you only shortchange yourself.

        Check out some of the BEN industry sites.

        http://www.irta.com/

        http://www.nate.org/

        Posted by Trish | July 31, 2009, 3:44 pm
  2. One more thing: I think you do have a point when it comes to the surveys. Doesn’t sound too accurate to me either:-)

    Posted by Trish | July 31, 2009, 3:45 pm

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