Thursday, June 20, 2019

Cheap Trade Credit and Competition in Downstream Markets

By: Mariassunta GiannettiNicolas Serrano-VelardeEmanuele Tarantino
Abstract: Using a unique dataset with information on 20 million inter-firm transactions, we provide evidence that suppliers offer cheap trade credit to ease competition in downstream markets. We show theoretically that trade credit allows suppliers to transfer surplus to high-bargaining-power customers while preserving sales to other buyers. Suppliers optimally choose a trade credit limit up to which customers can purchase on account. This contractual feature allows suppliers to target infra-marginal units and to leave unaffected customers' marginal costs. Empirically, we find that suppliers grant trade credit to high-bargaining-power customers only when they fear the cannibalization of sales to other low-bargaining-power customers. Exploiting a law that lowered the cost of offering trade credit, we show that higher provision of trade credit to high-bargaining-power customers leads to an expansion of the suppliers' customer base and higher growth of sales to low-bargaining-power customers.
   
   
   
URL: http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2018_062&r=com

https://lawprofessors.typepad.com/antitrustprof_blog/2019/06/cheap-trade-credit-and-competition-in-downstream-markets.html

| Permalink

Comments

Post a comment