Effects of Customer Industry Competition on Suppliers: Evidence from Product Market Competition Shocks

62 Pages Posted: 16 Jan 2018 Last revised: 11 Mar 2020

See all articles by Srinivasan Selvam

Srinivasan Selvam

Peking University - HSBC Business School

Date Written: February 10, 2020

Abstract

We examine the effect of increased customer industry competition on relationships with suppliers, using exogenous variation in industry-level tariffs. We find that customers facing significant tariff reductions increase output by increasing product purchases and maintaining longer relationship durations with existing suppliers. These results are concentrated in strategically important suppliers such as those that have stronger prior relationship ties to customers and among those suppliers that are financially constrained due to capacity constraints among suppliers. However, customers who increase purchases from financially constrained suppliers perform poorly in the post-tariff reduction period. Overall, our results indicate that an increase in customer industry competition improves suppliers’ bargaining power and has both intended and unintended consequences for customers’ trading relationships and future performance.

Keywords: Product market competition; Import competition; Customer-supplier relationship; Firm performance; Financial constraint

JEL Classification: G30, L13, L14, L16

Suggested Citation

Selvam, Srinivasan, Effects of Customer Industry Competition on Suppliers: Evidence from Product Market Competition Shocks (February 10, 2020). 9th Conference on Financial Markets and Corporate Governance (FMCG) 2018, Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3102788

Srinivasan Selvam (Contact Author)

Peking University - HSBC Business School ( email )

University Town
Shenzhen, 518055
China

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