Trade and Linked Exchange; Price Discrimination Through Transaction Bundling

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.