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Cheap Trade Credit and Competition in Downstream Markets

Mariassunta Giannetti, Nicolas Serrano-Velarde () and Emanuele Tarantino

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Using a unique dataset with information on 20 million inter-firm transactions, we provide evidence that suppliers offer cheap trade credit to ease competition in downstream markets. We show theoretically that trade credit allows suppliers to transfer surplus to high-bargaining-power customers while preserving sales to other buyers. Suppliers optimally choose a trade credit limit up to which customers can purchase on account. This contractual feature allows suppliers to target infra-marginal units and to leave unaffected customers' marginal costs. Empirically, we find that suppliers grant trade credit to high-bargaining-power customers only when they fear the cannibalization of sales to other low-bargaining-power customers. Exploiting a law that lowered the cost of offering trade credit, we show that higher provision of trade credit to high-bargaining-power customers leads to an expansion of the suppliers' customer base and higher growth of sales to low-bargaining-power customers.

Keywords: Trade credit; competition; input prices; supply chains (search for similar items in EconPapers)
JEL-codes: G3 D2 L1 (search for similar items in EconPapers)
Pages: 62
Date: 2018-12
New Economics Papers: this item is included in nep-com and nep-ind
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