Customer-Supplier Interactions and Expected Returns

Abstract

Supply chain interactions are a critical aspect of any firm's competitive strategy, and involve both input price negotiations and complementary investment decisions. This paper provides a model of strategic investment that predicts how customers match with suppliers, and how the way in which customers and suppliers strategically allocate joint profits affects firms' valuations and expected returns. We find that firms with greater impatience to invest --due to less diversified sales, smaller scale of production, or binding competitive threats in their product market-- extract less supply-chain profit. Crucially, these firms are not only less valuable, but also earn lower expected returns.

Keywords: Supply Chain, Expected Returns, Investment, Customers, Suppliers, Bargaining.

JEL Classification: G11, G12, G31, L11, L14, L22