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.