What is reciprocal buying?  

2 Answers

chaseguinn's profile pic

chaseguinn | (Level 1) Adjunct Educator

Posted on

Reciprocal buying is just two businesses entering into an agreement to buy each others' goods.

Think of a large company with lots of business lines, like Johnson and Johnson. They have hundreds of suppliers and customers. Let's say the have a shampoo manufacturer who owns the factory where they make J&J's shampoo. The owner of the factory sells the shampoo to J&J who sells it to a retailer. But the factory own also has to stock the first aid kits on his factory floor with bandages. J&J sells him the bandages. Codifying this in a contract would create a reciprocal buying arrangement. J&J buys x amount of shampoo in exchange for the factory owner buying x bandages for his first aid kits.

This is example is clearly contrived, but illustrates the points. A common, more abstract example would be banks executing credit swaps, agreeing to reciprocally buy fixed-rate credit for floating-rate credit. It's the same basic principle: an agreement for two counterparties to buy one anothers' goods.

kipling2448's profile pic

kipling2448 | (Level 3) Educator Emeritus

Posted on

Reciprocal buying refers to an agreement between two or more companies to purchase each other's products, often irrespective of whether such purchases represent the lowest cost or best value to the buyers. Such arrangements often draw the attention of government regulators because they do not allow for the introduction into the equation of additional companies whose products may be more cost-effective but whose exclusion from the arrangement condemns such companies from being able to take part. As the Department of Justice monitors the business world for threats to the free market competition that provides the foundation of the nation's economy, any arrangement between two or more companies that appears to reduce competition is scrutinized for any possible transgression of federal regulations pertaining to trusts and oligopolies. 

Reciprocal buying arrangements can be confusing on the surface, as one business is usually a supplier to the other, such as when Company A sells parts to Company B that are used in the latter company's manufacturing process. The potential for a reciprocal buying arrangement would, consequently, appear minimal. For better or for worse, however, such arrangements can exist if Company A agrees to buy from Company B the final manufactured product or some other good or service Company B provides. So-called offset arrangements, in which one company agrees to purchase an unrelated good or service from another company as a way of ensuring reciprocity in their relationship--in other words, each company buys something the other has to sell--do occur fairly regularly on an international level. Country X helps a company within its border sell its product to Country Z. Country Z will agree to purchase that foreign company's goods only if that company agrees to perform at least some of the work associated with the manufacture of the good in question in Country Z. By way of example, Country Z agrees to buy a fleet of trucks from a company in Country X, but only if the manufacturer in Country X agrees to manufacture the product in Country Z so that its workers can have jobs rather than the workers in Country X. 

Without complicating the picture too much, it is sufficient to say that reciprocal buying is simply an agreement by two or more businesses to take care of each other's bottom line by ensuring markets for each other's goods.