Customer-Supplier Interactions and Expected Returns
60 Pages Posted: 2 Jan 2019 Last revised: 24 Jun 2021
Date Written: December 1, 2020
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
Suggested Citation: Suggested Citation