Cheap Trade Credit and Competition in Downstream Markets

64 Pages Posted: 20 Nov 2017 Last revised: 29 Apr 2020

See all articles by Mariassunta Giannetti

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Nicolas Andre Benigno Serrano-Velarde

Bocconi University

Emanuele Tarantino

University of Mannheim - Department of Economics; Tilburg Law and Economics Center (TILEC)

Multiple version iconThere are 2 versions of this paper

Date Written: April 29, 2020

Abstract

Using information on about 10 million inter-firm transactions, we provide evidence that suppliers offer cheap trade credit to ease competition in downstream markets. We show theoretically that suppliers that have to transfer surplus to high-bargaining-power customers would want to offer an increasing price schedule to preserve sales to other buyers. Suppliers can implement this by choosing a trade credit limit up to which customers can purchase on account. This contractual feature allows suppliers to maintain high-bargaining-power customers' marginal costs high and limits competition in the downstream market. Empirically, we find that trade credit targets infra-marginal units and is granted when suppliers fear the cannibalization of sales to other 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' sales to low-bargaining-power customers.

Keywords: Trade credit, competition, input prices, supply chains

JEL Classification: G3, D2, L1

Suggested Citation

Giannetti, Mariassunta and Serrano-Velarde, Nicolas Andre Benigno and Tarantino, Emanuele, Cheap Trade Credit and Competition in Downstream Markets (April 29, 2020). Swedish House of Finance Research Paper No. 17-20, Available at SSRN: https://ssrn.com/abstract=3070979 or http://dx.doi.org/10.2139/ssrn.3070979

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Nicolas Andre Benigno Serrano-Velarde

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://https://sites.google.com/site/nicolasserranovelarde/

Emanuele Tarantino

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
295
Abstract Views
1,763
rank
113,667
PlumX Metrics