HD28
.M414
ALFRED
P.
WORKING PAPER
SLOAN SCHOOL OF MANAGEMENT
Barter in Networks:
A Revived Form of Inter-Firm Exchange
Stephan Schrader
December, 1991
WP# ^3^9-^1
MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
50 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139
Barter in Networks:
A Revived
Form
of Inter-Firm Exchange
Stephan Schrader
December, 1991
WP# ^3^9-^1
5RS
Massachusetts Institute of Technology
Alfred P. Sloan School of
Management
50 Memorial Drive, E52-553
Cambridge, Massachusetts 02139
(617 253-5219)
M
IT. LIBRARIES
FEB
2
1
1992
Barter in Networks:
A Revived Form of Inter-Firm Exchange
*^
Summary
Firms frequently enter network type relationships such as strategic alliances
and partnerships
to barter difficult-to-price
goods
like technical
know-how, market
understanding, and management practices. The paper proposes that barter of
difficult-to-price
goods
is
easier to realize than a
the double coincidence of wants
is
given.
money-based exchange
Under such circumstances,
— as long as
barter requires
decisions of less cognitive complexity than are necessary in the context of a
money-
based exchange system. Networks support barter through allowing temporal
separation of transactions, facilitating identification of transaction possibilities, and
establishing
role of
mechanisms
to enforce cooperative behavior.
networks complements other explanations
especially the ones derived
^
from a transaction
cost
The barter-supporting
for the existence of networks,
framework.
thank Klaus Brockhof, Jack Brittain, Nicolaus Henke, William M. Riggs, Jill D. Teplensky as
well as the participants of the 1991 Academy of Management Review Theory Development
I
Workshop
for their insightful
presented at the 1991
comments and suggestions. An earlier version of
of Management Annual Meeting, Miami Beach.
Academy
this
paper was
-3
Introduction
Inter-firm networks have received considerable attention in recent years.
Popular business publications proclaim that the formation of networks constitutes
an integral part of a successful business strategy
academic
Barley
&
articles
1979;
Ouchi
&
Jarillo, 1988;
Luke, Begun,
&
&
(e.g.
Kanda, 1990; Gemiinden, 1990;
Pointer, 1989;
MacMillan
&
Farmer,
Bolton, 1988; Porter, 1990; Saxenian, 1989; Thorelli, 1986). This paper
investigates a characteristic of networks that has been widely neglected
literature: the
Numerous
Economist, 1990).
attempt to conceptualize core issues of inter-firm networking
Freeman, 1990; Furukawa, Teramoto,
Hakansson, 1987;
(e.g.
support of barter as a
Networks provide the frame
mode
for a
by the
of exchange.
multitude of transactions,
many
of those
involving barter. Firms engage in strategic alliances or partnerships to barter, for
example, technical
for technology
know-how
(Hamel, Doz,
&
for
management experience
or market understanding
Prahalad, 1989; Leadbeater, 1990; Roberts, 1980).
Several authors have described informal inter-firm networks in which goods such
as technical information are not traded for
— even
1991,
if
von
bartered for other like goods
the goods are of considerable economic value (Rogers, 1982; Schrader,
Flippel, 1987).
In this paper,
distinct
money but
I
propose that situations
exist in
which a barter system
offers
advantages over a trade-for-money system. These advantages exist
especially
if it is
difficult to
put a monetary value on the goods to be exchanged, as
frequently the case for goods like information or market access.
is
Under such
circumstances, networks help to establish barter systems and to capture the benefits
of such systems.
To
characterize situations prone to barter,
the ability to specify the attributes of a
I
introduce a distinction between
good and the
ability to price the
good
in
4-
monetary terms. Most authors discuss only one of these dimensions
(e.g.
Williamson, 1975) or view them as closely linked
Based on
(e.g.
Arrow,
1971).
this
unique transaction modes are characterized: discrete purchase and
distinction, four
discrete barter as well as relational purchase
and
relational barter.
I
argue that
networks support both relational barter and discrete barter through allowing
temporal separation of transactions,
facilitating identification of transaction
and establishing mechanisms
possibilities,
characteristic of
argument
This
networks augments the traditional transaction cost and
communication oriented explanations
the
to enforce cooperative behavior.
that barter
is
for the existence of networks.
the preferred transaction
mode
if
Furthermore,
prices are difficult or
impossible to determine implies that those conventional control and decision
practices relying
on prices and related quantitative measures are
barter-supporting networks.
ramifications
and should encourage the study of how
The paper
literature
on
This conclusion has considerable
consists of four parts.
inter-firm networks.
Next,
barter from trade-for-money. Then,
mode
of exchange in
some
settings.
I
First, I
I
to
likely to fail in
management
govern such
situations.
review briefly some of the relevant
introduce a framework to distinguish
discuss
Finally,
why
I
barter appears to be the preferred
investigate
how networks
support the
emergence of barter systems.
Networks
as
Governance Structures
for Inter-Firm Relationships
Firms face several alternatives for organizing their vertical and horizontal
relationships.
are markets
The two
and
ideal types discussed
hierarchies.
between independent
entities
by Coase (1937) and Williamson (1975)
In market relationships, transactions take place
and are mediated by
a price
mechanism.
hierarchical relationships, the transaction partners are part of
In
one corporate body
-5
which somehow mediates the relationship through such mechar\isms as
surveillance, evaluation,
and
direction.
The market-hierarchy typology has served
for
more
several authors as a starting point
refined typologies. Ouchi (1980), for example, discusses three types:
markets, bureaucracies, and clans. The latter
is
characterized by a considerable
correspondence of organizational and individual goals.
Jarillo (1988)
classic
extends
this
typology by differentiating markets further into
markets and strategic networks. Classic markets are characterized by a
competitive relationship between transaction partners. Not so in strategic networks.
Strategic networks are based
on a potential
for cooperation.
The
possibility of
capturing long-term benefits from cooperative behavior induces firms to overcome
short-sighted opportunism and to enter long-term relationships while maintaining
most of
their organizational
MacNeil (1978)
independence.
differentiates
market contracts even
He
further.
introduces
three types of contracts: classical contracts (the identity of the transaction partner
irrelevant
and each party's obligation
is
is
well-defined), neoclassical contracts (mostly
long term contracts that provide governance structures for solving potential
conflicts instead of explicitly anticipating
contracts (agreements
that
may
on governance
every contingency), and relational
structures for entire long-term relationships
evolve well beyond the originally planned transactions).
This paper adopts Thorelli's definition of networks as "two or
organizations involved in long- term relationships" (Thorelli, 1986,
more
p. 37),
and
thereby includes both neoclassical and relational contracts. These relationships can
be of contractual as well as non-contractual nature. In most cases, a mixture of both
will
be present (Macaulay, 1963). The definition used
encompass several forms of
is
sufficiently
inter-firm relationship, ranging
organized networks such as supply networks
(Jarillo,
from
open
to
explicitly
1988) to implicitly evolved
networks such as informal information trading networks between competitors (von
Hippel, 1987; Schrader, 1991).
The Hterature discusses networks primarily
relationships.
Note, however, that organizations frequently engage not only in
but also in horizontal networks. Research consortia with competing firms
vertical
as
in the context of vertical
members
are a case in point (Dimancescu
&
such consortia have developed formal horizontal
resource pooling and risk sharing.
competing firms
is
Firms participating in
Botkin, 1986).
ties to
gain advantages from
Informal information trading between
another example (Carter, 1989; Schrader, 1991; von Hippel, 1987).
Firms within one industry are linked by informal communication networks.
Employees exchange information
Why
do networks
in these
networks without
explicit contracts.
The conventional explanation
exist?
as provided, for
example, by MacMillan and Farmer (1979) argues that networks capture core benefits
of markets while enjoying
networks enable firms
(Jarillo, 1988).
good and
benefit
some
transaction costs advantages of hierarchies.
to realize
economies of scale and specialization advantages
One network member may
distribute the
good
to the other
specialize
on the production of a
entities.
And
the market test
is still
existing
network (MacMillan
&
its
Farmer, 1979,
captive internal markets."
networks allow a
less
p. 283).
is
spread
better trading
tie (as in
Jarillo (1988, p. 35)
in
the case of
concludes:
an integrated firm,
Also, in times of considerable technical change,
expensive restructuring of a firm's
ties to specific
than would be possible in the context of hierarchies (DeBresson
forthcoming).
If
Risk
from forming new relationships outside the
"Networking introduces a cost discipline that may be absent
with
firms.
applicable.
terms can be obtained elsewhere in the long run, no permanent
vertical integration) stops either party
specific
members. Thus, the network partners
from the organizational advantages of small specialized
between different
First,
&
technologies
Amesse,
Second, networks capture benefits of hierarchies. Networks help
to
7-
avoid some of the transaction costs that emerge in a pure market system due to
opportunistic behavior and asset specificity
Crawford,
&
(Jarillo,
1988; Joskow, 1987; Klein,
Alchian, 1978; Thorelli, 1986; Williamson, 1985).
Crawford and
Klein,
Alchian (1978), for example, demonstrate the negotiation problems that arise in
supply relationships
specific assets.
if
either of
two contract partners has
to invest in relationship-
Such problems can be mediated by networks. For
this,
the network
partners have to expect that they will benefit from an ongoing cooperative
relationship
result
and
that this benefit
overcompensates any short-term gains that would
from opportunistic behavior
Consequently, network partners
(Jarillo, 1988).
are willing to invest in network-specific assets even
dependency and thereby vulnerability
members
to threats.
will not use this vulnerability to cause
In this paper,
I
1
.
this increases their
They
trust that other
network
them undue harm.
propose that the conventional theory of networks should be
augmented by another
of barter systems
if
characteristic of networks.
argue that
this is
some goods can be bartered more
Networks support the emergence
an important characteristic of networks since
effectively than they can
be traded for money.
Before this argument can be explored further, however, the concept of barter needs
clarification.
Barter
Barter
good
is
is
a
form of "reciprocal dealing"
exchanged
medium
for another
(Thorelli, 1986, p. 44) in
good without using
a separate unit of account or
of exchange (Pearce, 1986, p. 36). These reciprocal dealings
simultaneously. For example,
IBM
may
gives Siemens access to (parts) of
production technology and at the same time Siemens provides
its
technical expertise (Markoff, 1990).
which one
its
occur
chip
IBM with
access to
Alternatively, a temporal separation of
-8
transactions can occur (von Weizsacker, 1985).
exploration industry as an example.
Take information trading
In this industry,
observed to exchange well-logs informally (Schrader
In
some
instances, several
in the oil-
employees have been
&
von Hippel, forthcoming).
months can pass between giving one well-log and
The party
receiving another well-log in return.
that first provides a
good
to the
other party acquires a claim to receive a comparable good in the future.
In the following, three types of barter are distinguished: discrete barter,
relational barter,
and pseudo
Pseudo barter
barter.
sight appears to be barter but that can be readily
money
transactions.
Bartering crude
oil
refers to a transaction that at first
decomposed
into
two good-for-
of a specific grade for an equally well-
defined amount of wheat with both parties having the alternative of buying and
selling the respective
world market
transactions
out.^
commodities on the world market
prices, the barter can
is
a case in point.
Using
be broken up into two good-for-money
— including a side-payment
if
the respective
amounts do not cancel
Since pseudo-barter can be interpreted as a set of separate purchasing
agreements, the term barter as used in the remainder of the paper will not include
pseudo-barter.
Discrete barter refers to the exchange of one well-defined
well-defined good in a situation in which
readily available.
Assuming
barter distribution of
goods
commonly accepted
self-interested actors,
is
good
for another
valuations are not
such barter occurs
if
the post
preferred to the pre barter one. Yet, the parties need
not to be able or willing to agree on precise monetary prices for the goods. Even
if
each party would be capable of valuing the goods in exact monetary terms, the
valuations
do not necessarily have
negotiation space.
^
In this case,
that
is
to
be such that they determine a non-empty
Barter necessitates only that ordinal rankings of goods are such
an "objective" valuation of the goods exists insofar as the price is determined in a way
market participants' preferences (Weizsacker, 1985).
wridely independent of the individual
-9
that
an exchange
is
preferable, not that cardinal evaluations
would
an
justify
exchange.
In the case of discrete barter,
it is
not possible for a third party to deduce
without additional information the parties' valuations of the goods exchanged.
What can be determined
of another good.
parties
is
that x units of
one good have been exchanged
This relation, however, only conveys the information that the
have reached a
specific agreement.
information on the valuation of the goods.
many
units of a third
good
Von Weizsacker
the parties
It
does not convey any further
It is
would have exchanged
the goods in question.
down
(1985) argues convincingly that barter systems break
and
will require to
be compensated by side-payments. The resulting negotiations will lead
He
as
such valuations
If
occur, the parties will perceive, at least temporarily, inequalities
introduction of money-based exchange systems.
how
not possible to conclude for
soon as the parties evaluate specific transactions monetarily.
either required in
y units
for
to
an
proposes that valuation
an exchange relation (money-based exchange) or that
is
it is
explicitly or implicitly forbidden (barter).
Relational barter ^ differs from discrete barter
by the transaction content not
being well defined are well definable. Technical know-how, for example, frequently
falls into this
complex
category.
Know-how can be
set of subjective
knowledge
tacit,
ill-understood,
(Polanyi, 1958).
If
and embedded
such know-how
is
exchanged, any attempt to precisely stipulate the content of the exchange
to
fail.
Consequently, other
(explicit or implicit) contractual
to
is
in a
be
doomed
mechanisms have
to
be
employed. Relational contracting (MacNeil, 1978; MacNeil, 1980) provides an
alternative.
Here
it is
not the substance of the exchange that
rather procedural aspects
The notion
and relationship
of relational barter
is
characteristics.
is
determined, but
Examples of procedural
closely linked to MacNeil's (1980) concept of relational contracts.
10
regulations are control meetings, documentation requirements, and reporting
Sometimes these procedures are never agreed on
obligations.
out of an ongoing relationship.
An
extreme case of relational barter
In such collaborations,
collaboration.
explicitly but evolve
monetarily value individual transactions (what
a transaction in the context of an
is
may have
academic discourse?). Nevertheless, the partners
is
academic
frequently impossible to identify or to
it is
perceptions of wrhether the cooperation
is
w^ell-formed
beneficial to each of
them and
of
whether
the exchange should be continued in the future.
Barter
Discrete Barter
Relational Barter
Pseudo Barter
Substantive dimensions
of exchange can be
well-defined.
Valuative dimension
remains vague.
Substantive dimensions
of exchange cannot be
Decomposition into two
good-for-money transactions
plus sidepayment easily
Substantive contracting
Relational contracting
Figxire 1:
1
summarizes the proposed
relational barter.
distinction
between discrete barter and
for
each barter component.
A
decomposition of the barter
good-for-money transactions cannot be done without strong
assumptions, and
if it
=> Purchase
Both are characterized by the parties not having to agree on a
monetary price
into several
even
possible.
remains vague
Types of Barter
Figure
precise
well-defined.
Valuative dimension
— as von Weizsacker argues — probably
would be
possible.
is
not done by the parties
This characteristic distinguishes barter from money-
based exchange. In money-based exchange, the parties involved agree on precise
prices.
Frequently, such agreement
is
achieved by adopting established market
11-
prices.
Under other circumstances,
each party to generate
and
at least a
prices result fronn negotiations.
rough monetary valuation of the good
that the parties are able to agree
with the valuations by
Two
specific
monetary value
(the price) that
The two types are
to
goods
to
be transferred as classification
discrete purchase
an exchange
in
and
relational purchase.
which the good can be determined
the classical purchasing agreement as
it is
Discrete
relational purchase, the parties agree
This
precisely.
considered by traditional
microeconomic theory. Relational purchase provides a more interesting
fail
fits
types of money-based exchanges can be distinguished, again using the
purchase refers
is
on a
in question
all parties.
ability to specify the attributes of the
criterion.
This requires
on a price
for the
goods
to
case.
In a
be exchanged, but
to precisely specify the substance of the exchange. Consulting contracts are a case
in point.
back
Frequently, well established hourly rates exist and the parties can refer
to those rates
consulting
when determining
work cannot be agreed on
the consulting
work would be
established, using
means such
the exchange price.
Yet, the substance of the
in detail before the transaction
superfluous.
— otherwise
Therefore, a relational contract
as reputation, control procedures,
interactions to ensure that both parties are satisfied with the
and
outcome
is
iterative
of the
exchange.
In conclusion, the
— ability to specify attributes of
determine prices — can be used to
two dimensions discussed
the goods to be transferred
and
ability to
distinguish four types of exchange relationships that should be preferred under
different circumstances, as
shown
in Figure
2.
Whether or not the transaction
partners are able to specify ex ante the attributes of the goods to be exchanged
determines whether or not they will utilize substantive contracts or relational
contracts.
goods
for
Their ability to determine prices impacts their inclination to trade the
money
or to barter them.
-12-
13
— information, access computer
metal dies,
technology and market access — are exchanged within networks without a
Valuable goods
to
compensating flow of money.
goods are provided
The bank
to
use the other firms
bartered access to
own computer
One
These exchanges are part of a barter system. The
in the expectation of receiving other valuable
opened
that
facilities,
its
computer
facilities to
for
some type
of insurance against a
is
frequently bartered in networks
leading user of printed circuit boards (PCBs) and
motto was
PCB
"We
customer." The
close
user decided to change
are a
world
number
information.
its
of suppliers
was
In addition, the
its
bank
breakdown
of
its
we want
information.
A
to
its
suppliers.
be a world
The
class
greatly reduced to be able to develop a
A
system of long-term supply contracts was
companies bartered valuable, proprietary technical
Each firm was contributing some of
production, and testing and
is
suppliers shall serve as an
relationships to
class manufacturer,
network with the remaining ones.
established.
In other words, the
system.^
type of good that
example. The
in return.
a competitor thereby gained the right
facilities in a similar situation.
its facilities
goods
was
receiving similar
its
knowledge regarding design,
knowledge and other
difficult to
price goods such as greater supplier reliability in return.
Barter of information in networks can also be observed between rival firms
(von Hippel, 1987; Schrader, 1991). In some instances, the horizontal exchange of
information
is
supported by other organizations that are placed in the vertical chain
before or after the horizontal network.
encourage
their
For example, some equipment suppliers
customers to exchange technical information between each other in
so-called user groups.
Similarly, manufacturers frequently induce irxformation
trading between their suppliers. Concast's
In addition, the
spillover.
bank might have been motivated
management
to
of
its
customer's relations
help in order to prevent a negative image
-14-
demonstrates the vertical support of horizontal information exchange networks.
Concast
steel
a leading supplier of continuous casters, a crucial piece of
is
minimills and
nowadays
for other steel
the industry, Concast required
modifications back to Concast.
its
companies as
well.
equipment
for
In the early years of
customers to feed irxformation about equipment
Concast in turn communicated
this
information to
other customers. This system can be interpreted as an indirect barter system. Each
equipment user contributes technical expertise
to the
network and gains access
down when
other users' expertise. The system, however, started to break
community evolved and
to
the user
the level of technical sophistication started to vary
strongly between firms, leading to a perceived inequality of the exchange.
Advantages of Barter
The observation
exchanged
that
many goods
monetary compensation
for
are bartered in networks
is
puzzling
economists have assumed barter to be an inferior
to trade-for-money.
A
at first sight.
mode
and are not
Traditionally,
of exchange in comparison
frequently cited argument in support of the supremacy of
money-based exchange
that barter requires finding a partner that
is
wants what one
has and that has what one wants, the so called double coincidence of wants (Pearce,
1986; Samuelson, 1985).
of
A
trade-for-money system, however, allows decomposition
one barter transaction into two transactions
No
partners.
double coincidence of wants
is
that
may
occur with different
necessary. This
,
so the argument goes,
reduces transaction frictions in comparison with a barter system. In the following,
however,
system.
I
argue that not
The
all
advantages
barter system has
complexity of trading decisions
advantages are discussed next.
some
is
fall
distinct
on the side of the trade-for-money
advantages as well, especially that the
frequently reduced through barter. Three
-15
(1)
Barter decisions are of less complexity than corresponding trade-for-money
decisions.
A
money-based exchange of two goods frequently requires considerable
due
sophistication
to the transaction partners
having
to agree
on a
specific
monetary
valuation as transaction price. This might be simple for goods with well established
market
prices, but,
Arrow
(1971) argues that in
it
can be
difficult for
many
unique goods, especially
cases the value of a specific unit of information
cannot be estimated without knowing the information.
known, no further need
for information.
for acquiring
it
But once the information
is
exists.
Barter does not require a quantification of value.
transaction partners are able to order potential outcomes
Barter requires only that the
(i.e.
according to their preferences. To establish ordinal rankings
trade or
is less
no
trade)
cumbersome
than to establish cardinal evaluations. This shall be exemplified using a simple case
in
which substantive contracting
A
manufacturer
circuit boards.
is
has developed a
Assume one
possible.
new
printed circuit board
technology for soldering components to
And, assume another manufacturer B has improved existing
technology considerably.
Both firms would benefit from the other firm's
technology. In a trade-for-money system the sale of the two technologies
be linked. Each technology
A's technology to B,
determine
its
A
is
has to determine
price.
the final price for the transaction.
Now
and
that
its
would not
considered separately. For the decision whether to
maximum buying
considers selling
testing
A
its
minimum
selling price
and B has
Subsequently both parties have
similar set of decisions has to be
sell
to
to negotiate
made when B
technology.
assume both firms consider whether or not
no additional transaction
possibility
is
to barter their technologies
considered
at the
same
time.^
In this
This argument assumes that both parties have identified the possibility to barter. The difficulty
of identifying such possibilities creates one major obstacle to barter (Samuelson, 1985; Weizsacker,
1985). In the next section it will be shown that networks support the identification of barter
possibilities.
-16
case, the
complexity of the trading decision
whether or not they would be better
two
alternative.
They merely have
way
to
both
it
A
and B deciding
to quantify the value they attribute to
rank order the alternatives.
to
the value of different alternatives,
does not hold true the other
reduced
swapping technologies. These are the only
offer
The firms do not need
decisions.
is
naturally can rank order
If
each
a firm can quantify
them
But
as well.
this
around. To be able to rank order two alternatives
does not imply that the value of the alternatives can be quantified. Consequently,
the decision whether to barter
to trade the
(2)
goods
for
two goods
is less
complex than the decision whether
money.^
Likelihood of valuation conflicts
parties often quickly agree an
is
reduced. In contract negotiations,
exchange would be mutually
agree on the evaluation of the goods to be exchanged. This
the
good possessed by one party
is
of
little
beneficial, but fail to
is
especially a
problem
if
or no value without the good possessed by
the other party. In this case, the marginal value of each
good
is at
the
same time
zero and equal to the joint value, thus creating considerable negotiation problems.
Such situations
arise, for
example, in joint ventures
specialized assets (Teece, 1986).
One
both parties provide co-
party might provide market access and the
other party technology, both goods being of
situation, agreeing
if
little
value without the other. In such a
on barter and avoiding the need
to agree
on valuations increases
greatly the likelihood that the parties will engage in a mutually beneficial exchange.
Conflicts over valuations are thus avoided (von Weizsacker, 1985).
(3)
Barter communicates less information about firms' valuations.
course of price negations, each party conveys considerable information to
negotiation partner (Raiffa, 1982).
To know
The more fine-grained the barter problem
is
In the
its
the approximate price a competitor
framed, the more
it
is
approaches the complexity of the
the smallest units to be bartered equal the smallest monetary
the parties frame the barter decisions in these units, then both decisions are of
related trade-for-money decisions.
If
units, and if
comparable complexity. But frequently the units considered are not as fine-grained.
-17-
willing to
pay
for a specific
technology can convey information about the
competitor's technology strategy and technical capabilities. Negotiations in a barter
system potentially convey
less information.
The transaction partners gain
intelligence of each other's ordinal rankings, but not of the absolute valuations of
Consequently, the
different alternatives.
convey
less
in a negotiation process to another
to favor barter
information a
company wants
company, the more
it
might be inclined
over trade-for-money.
money-based exchange of
In conclusion, a
difficult-to-price
goods such as
market access or technical know-how confronts the firms involved
with highly complex decision problems. Using a barter based
instead of a
money based one reduces
(once the barter possibility
is
mode
in the
that abstracting
the complexity of these decisions considerably
identified), thus decreasing the direct contracting costs
from the
difficulties to
Yet,
accuracy, then
mode
if
it
can be
determine prices, a barter system can
lead to inefficiencies in the allocation of resources, especially
divisible.
exchange
of exchange
and increasing the chance of reaching a positive agreement. However,
shown
to
if
goods are non-
the firm-specific value of the goods cannot be determined with
it is
not meaningful to argue that barter
than a money-based exchange;
it
is
a less efficient allocation
might be the only one acceptable to the
decision makers involved.
How Networks Support Barter
One
of the disadvantages of barter
(Pearce, 1986, p. 36)
is
is
that a "double coincidence of
wants"
required for a successful transaction. Networks reduce the
severity of this disadvantage.
First,
frequent interactions help network
members
to
develop a good
understanding of potential contributions and needs of other members, thereby
18
increasing the likelihood of recognizing the possibility for a mutually beneficial
exchange. In addition, institutions to support the identification of barter
possibilities are frequently created.
regular meetings,
and informal
Such
contacts.
institution
may
be industry directories,
Oil-exploration firms, for example,
individuals specifically to trade information informally (Schrader
&
employ
von Hippel,
forthcoming). These employees, the so called oil-scouts, are organized in
professional associations
oil-scouts report
prior
on the
week without
and meet
regularly,
i.e.
once a week. In these meetings, the
drilling activities that their firms
revealing the data gathered.
to identify trading possibilities.
on a one-to-one basis
undertook during the
In other words, the meetings help
After the meeting, individual scouts might arrange
to barter specific data.
Second, networks provide an institutional setting to enforce commitments,
generating the possibility for a temporal separation of the quid-pro-quo. In a
network, two goods do not need to be bartered simultaneously. Rather, one party
can provide the other party with a good while obliging the receiver to
of the barter at an appropriate time in the future.
and
its
risks
own
part
Powerful mechanisms are
available to enforce the fulfillment of such commitments.
member
fulfill its
both the direct relationship to the party that
A
is
non-cooperative
to receive the benefit,
reputation in the network (Axelrod, 1984; Hardin, 1982). Thus, not to
honor commitments can lead
The resulting
to considerable
network disadvantages
(Jarillo, 1988).^
possibility for a temporal separation of contributions reduces the
restricting effect of the
have matching wants
double coincidence of wants. The exchange partners need not
at a
given point in time. Barter
is
possible as long as they can
expect that over time their (appropriately discounted) needs match.
^
Bhide and Stevenson (1990) doubt that these mechanisms really work. They speculate that parties
fulfill their obligations t)ecause they feel morally obliged to do so and not because of any economic
rational.
19
Third, networks support not only discrete barter but are especially effective for
Networks can provide powerful frames
relational barter.
establishing procedures
Thus, the
and norms
for relational contracts
by
for interaction (Aldrich, 1979; Tichy, 1981).
(explicit or implicit) barter contract
can be limited to a few special
concerns, thereby reducing transaction costs.
Fourth, tight-knit networks with high interdependence between
members
its
frequently provide the possibility to turn one-to-one barter into a one-to-group
barter, thereby eliminating the requirement for a double-coincidence of wants.
those networks, one
without expecting
member might provide another member with
to receive a service
provision, however, the
member
from other members
fulfills its
The network
the network
other
— even
network
if
role thus legitimizing
possibility of obtaining
and
to obtain
or service
membership
no dyadic trading relationship
benefits
its
goods and
participants barter their contribution for the right to be a
members (von Weizsacker,
In
good
back from that specific member. Through the
membership. The membership provides the
services
a
In
is
formed.
member
of
— created through contributions by
1985).
sum, networks encourage the emergence of barter by providing a frame
identifying barter possibilities.
They increase the chance
of barter
by allowing
for
a
temporal separation of contributions and by offering mechanisms for inducing
cooperative behavior. They reduce the costs of barter contracts by having related
procedures of interaction and relationship norms anchored in the network. Tightknit networks
may even
eliminate the need for a double coincidence of wants.
Without networks, barter
is difficult
to realize.
partners with matching wants can be
The
identification of potential barter
cumbersome (Samuelson,
1985).
Temporal
separation of transactions creates considerable contract enforcement problems.
And
possible difficulties of precisely identifying the substance of the barter provides a
challenge to the contracting process.
20
The barter-supporting
characteristic of
networks helps
to explain the recent
emergence of networks
for
management
All these goods are difficult-to-value
The
practices.
characteristics of such
mode
exchanging goods such technology, market access, and
goods strongly favor
and
difficult-to-specify.
relational barter as the interaction
instead of traditional ones like purchasing agreements and simple licensing
As shown,
contracts.
barter
is
difficult to establish
if
not supported by networks.
Consequently, firms that want to exchange difficult-to-value goods are induced
establish inter-firm
networks such as
alliances, partnerships,
and
to
joint ventures to
provide the framework supportive of barter.
Mutual Reinforcement of Networks and Barter
Two
paths can lead from the identification of potential barter-possibilities to
the establishment of barter-supporting networks.
First,
may
firms
establish network-type relationships to establish a governance
support of barter transactions. This
is
many
a central motivation of
cooperation only vaguely hoping that once the network
difficult to
determine and realize specific barter
Daimler Benz and Mitsubishi
set
framework
in
strategic
Frequently, firms enter alliances after having identified areas of potential
alliances.
was
consciously
up
in 1990, the firms
is
The
a case in point (Sanger, 1990).
merely agreed
this,
established
possibilities.
it
will
alliance
When
be
less
between
this alliance
to cooperate, leaving to the individual
business units the task of determining specific market
exchanged. In cases like
is
skills
and technologies
to
be
the establishment of networks drives the emergence of
barter transactions.
Barter transactions, however, can also drive the establishment
of networks.
common
Repeated interaction
interaction
and
stabilization
fosters trust (Axelrod, 1984), the formation of
norms (Ullmann-Margalit,
1977),
and the evolution of a shared
21
language (Hall, 1959),
networks.
all
of these supporting the establishment and stabilization of
In the very beginnings of the oil-exploration industry, firms
a one-to-one basis valuable geological
exchanged on
and geophysical information, each exchange
being independent of other interactions. Over time, the reoccurrence of such
transactions led to the evolution of informal inter-firm networks.
Later, these
informal networks became institutionalized in the form of oil-scout-associations that
provide a framework for the barter transactions.
Once networks
are established successfully, they are self-reinforcing.
They
support the identification of further barter possibilities and, due to the repeated
occurrence of like interactions, reduce the transaction costs of individual
transactions.
Consequently, the overall number of transactions
This, in turn, strengthens the networks even further.
(1973) has
shown
demonstrated
for personal
for the
some circumstances
lies
However,
likely to increase.
as Granovetter
networks and as Glasmeier (forthcoming) has
Swiss watch industry,
this continual
reinforcement can under
actually be the cause for the long-term decline of the network.
The network may become overly
information that
is
beyond
its
self-centered, unable to detect
and access
realm of expertise.
Figure 3 summarizes the discussed relationship between barter and the
establishment of networks.
It
demonstrates the existence of different paths towards
the establishment and/or stabilization of networks.
facilitate the identification
and
And
it
shows
that
networks
assist the realization of barter possibilities.
22
Identification of potential
possibilities to
exchange
goods
difficult to price
23-
Conclusion
This paper proposes that firms frequently use network-type relationships
such as strategic alliances and partnerships to barter difficult-to-price goods
technical
know-how, market understanding, and management
practices.
like
The paper
argues that barter has some distinct advantages over a money-based exchange for
such goods
— as long as the double coincidence of wants
is
given.
Under such
circumstances, barter requires decisions of less cognitive complexity than are
necessary in the context of a money-based exchange system. Networks support
barter through allowing temporal separation of transactions, facilitating
identification of transaction possibilities,
and establishing mechanisms
to enforce
cooperative behavior.
The paper suggests
modes
increases the
opportunities
may
that the inclusion of barter in a firm's
number
of potential transactions.
Some
beneficial transaction
not be realized without considering barter.
however, that barter
is
for
It is
always the preferred transaction mode. In
especially in situations in
goods are available,
mix of transaction
which
not argued,
many
situations,
and widely accepted valuations of
"objective"
example through market
prices, a trade-for-money has
considerable transaction advantages.
Network
structures support the barter of such valuable
difficult-to-price
goods as technology and other organizational
and
at the
skills.
same time
Many
researchers have suggested that these goods are of increasing importance for the
competitiveness of firms (Dertouzos, Lester,
1984).
Since, as
Solow, 1989; Hayes
&
Wheelwright,
argued above, these goods are frequently more easily bartered than
traded for money, firms that are not set
up
be
are.
at a
«&
disadvantage to those firms that
to participate in barter transactions
might
Networks provide a context within
which organizations can enter cooperative trading relationships based on a mix
24-
between trade-for-money and
possibilities
and induce
incentives to decide
time, but rather
on
barter.
Networks support the
identification of barter
actors to forgo opportunistic behavior.
interaction strategies not
They provide
by evaluating one transaction
by considering the potential stream of transactions
within the network.
Thereby, cooperative behavior
The barter-supporting
quality of networks
augments the majority of the
In
some
both barter and transaction costs explanations supplement each other.
may
fulfill
several functions at the
same
may be
time, encouraging barter
only one framework for understanding networks.
than one purpose, more than one explanation
The proposition
that barter
is
is
it is
not enough to consider
Since networks
may
serve
more
needed.
the preferred transaction
mode
if
prices are
impossible to determine implies that those conventional control and
decision practices relying
fail
Other
created only to support barter or only to overcome transaction
problems of markets or hierarchies. This suggests that
difficult or
cases,
Some
transactions and, for example, allowing relationship specific investments.
networks
occur
encouraged.
is
transaction-cost-based explanations for the existence of networks.
networks
may
that
at a
on
prices
in barter-supporting networks.
and
related quantitative measures are likely to
In this case other,
more process oriented
control
measures might be needed. This conclusion has considerable management
ramifications
and should encourage the study
of
how
to
govern such networks.
25
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