Cheap Trade Credit and Competition in Downstream Markets

Journal of Political Economy, forthcoming

Swedish House of Finance Research Paper No. 17-20

68 Pages Posted: 20 Nov 2017 Last revised: 2 Nov 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

Luiss Guido Carli University; Einaudi Institute for Economics and Finance (EIEF)

Multiple version iconThere are 2 versions of this paper

Date Written: October 25, 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 (October 25, 2020). Journal of Political Economy, forthcoming , 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 )

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+46 8 736 9607 (Phone)
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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
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1000 Brussels
Belgium

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

Swedish House of Finance ( email )

Drottninggatan 98
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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

Luiss Guido Carli University ( email )

Via O. Tommasini 1
Rome, Roma 00100
Italy

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

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