Cheap Trade Credit and Competition in Downstream Markets

61 Pages Posted: 15 Oct 2018 Last revised: 22 Oct 2018

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)

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Date Written: October 2018

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

JEL Classification: D2, G3, L1

Suggested Citation

Giannetti, Mariassunta and Serrano-Velarde, Nicolas Andre Benigno and Tarantino, Emanuele, Cheap Trade Credit and Competition in Downstream Markets (October 2018). CEPR Discussion Paper No. DP13228, Available at SSRN: https://ssrn.com/abstract=3266420

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI)

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Swedish House of Finance ( email )

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Nicolas Andre Benigno Serrano-Velarde

Bocconi University ( email )

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Italy

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

Emanuele Tarantino

Luiss Guido Carli University ( email )

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Rome, Roma 00100
Italy

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

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Rome, 00187
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