The Economics and Finance of Customer-Supplier Relationships

Oxford Research Encyclopedia of Economics and Finance, Forthcoming

57 Pages Posted: 23 Apr 2021

See all articles by Ling Cen

Ling Cen

The Chinese University of Hong Kong

Sudipto Dasgupta

Chinese University of Hong Kong, ABFER, CEPR, and ECGI

Date Written: February 15, 2021

Abstract

The interrelationships between upstream supplier firms and downstream customer firms—popularly referred to as “supply-chain” relationships—constitute one of the most important linkages in the economy. Many facets of these linkages are explored. Suppliers not only provide production inputs for their customers, but increasingly, are engaging in R&D and innovation activity on their own that are beneficial to the customers. Yet, the high degree of relationship-specificity that such activities involve, and the difficulty of writing complete contracts, expose suppliers to potential hold-up problems. Mechanisms that mitigate opportunism are outlined, with implications for the origins of such relationships, firm boundary, and organizational structure. Smaller supplier firms benefit from relationships with large customer firms in many ways, such as knowledge sharing, operational efficiency, insulation from competition, and reputation in capital markets. However, customer bargaining power, undiversified customer base, and innovation strategy also expose suppliers to disruption risk. Relationship-specificity of investment, customer bargaining power, and customer concentration associated with a less-diversified customer base, have important consequences for financing decisions of suppliers and customers, such as capital structure choice and the provision and role of trade credit. Changes in the risk of disruption (e.g., bankruptcy filings, takeover activity, and credit market shocks) have spillover effects along the supply chain. The correlation of economic fundamentals of suppliers and customers and the co-attention that they receive from market participants translate to return predictability (with implications for trading strategies), information diffusion along the supply chain, and stock-price informativeness of supply-chain partners.

Keywords: Customers; Suppliers; Supply-Chain Relationships; Relationship-Specific Investment; Spillovers

JEL Classification: D21,D22,D23,D4,G30,G31,G32,G33,G34

Suggested Citation

Cen, Ling and Dasgupta, Sudipto, The Economics and Finance of Customer-Supplier Relationships (February 15, 2021). Oxford Research Encyclopedia of Economics and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3832460

Ling Cen

The Chinese University of Hong Kong ( email )

CYT Building
Sha Tin
Hong Kong, Hong Kong
Hong Kong

HOME PAGE: http:///sites.google.com/site/cenling/

Sudipto Dasgupta (Contact Author)

Chinese University of Hong Kong, ABFER, CEPR, and ECGI ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

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