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Cheap Trade Credit and Competition in Downstream Markets

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

No 13228, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Using a unique dataset with information on 20 million inter-firm transactions, we provide evidence that suppliers offer trade credit to high-bargaining-power customers to ease competition in downstream markets in which they have a large number of other clients. Differently from price discounts, trade credit targets infra-marginal units and does not lower the marginal cost of high-bargaining-power customers. As a consequence, the latter do not gain market share and the supplier can preserve profitable sales to low-bargaining-power customers. We show that empirically trade credit is not monotonically increasing in past purchases, as is consistent with our conjecture that it targets infra-marginal units. In addition, the supplier grants trade credit to high-bargaining-power-customers only when it fears the cannibalization of sales to other low-bargaining-power clients. Our results are not driven by differences in suppliers' ability to provide trade credit, customer-specific shocks, or endogenous location decisions.

Keywords: Competition; input prices; Supply Chains; trade credit (search for similar items in EconPapers)
JEL-codes: D2 G3 L1 (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-com
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