Cheap Trade Credit and Competition in Downstream Markets
Journal of Political Economy, forthcoming
68 Pages Posted: 20 Nov 2017 Last revised: 2 Nov 2020
Date Written: October 25, 2020
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: Suggested Citation