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The product differentiation hypothesis for corporate trade credit

Author

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  • George W. Blazenko

    (Simon Fraser University, Faculty of Business Administration, Burnaby, BC, Canada)

  • Kirk Vandezande

    (Solutions by Sequence Inc., Toronto, Ontario, Canada)

Abstract

The product differentiation hypothesis for trade credit says that business managers use trade credit like advertising to differentiate their products. Prior studies of this hypothesis conclude that higher profit margins induce firms to increase trade credit and vice versa. We better represent the relation between the cost of bad debts and the price of the product offered on credit. When prices are higher, firms suffer greater losses from non-payment. Our model shows that, contrary to early versions of the product differentiation hypothesis, when managers adjust trade credit and profit margins for a perturbation in marginal cost, optimal profit margin and trade credit may move in opposite directions. A manager maintains revenue for price elastic demand by moderating the price increase, which decreases profit margin. At the same time, the manager also increases trade credit, which serves to maintain revenue by encouraging product demand. We report evidence of a negative relation between corporate receivables and profit margin. Copyright © 2003 John Wiley & Sons, Ltd.

Suggested Citation

  • George W. Blazenko & Kirk Vandezande, 2003. "The product differentiation hypothesis for corporate trade credit," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 24(6-7), pages 457-469.
    • Handle: RePEc:wly:mgtdec:v:24:y:2003:i:6-7:p:457-469
    DOI: 10.1002/mde.1113
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    References listed on IDEAS

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    6. Emery, Gary W., 1987. "An Optimal Financial Response to Variable Demand," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(2), pages 209-225, June.
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    Cited by:

    1. Galia Taseva, 2012. "Trade Credit Terms between the Firms in Bulgaria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 110-136.
    2. Frederic Boissay & Reint Gropp, 2007. "Trade Credit Defaults and Liquidity Provision by Firms," Working Paper Series: Finance and Accounting 179, Department of Finance, Goethe University Frankfurt am Main.
    3. Shenoy, Jaideep & Williams, Ryan, 2017. "Trade credit and the joint effects of supplier and customer financial characteristics," Journal of Financial Intermediation, Elsevier, vol. 29(C), pages 68-80.
    4. Wetzel, Philipp & Hofmann, Erik, 2019. "Supply chain finance, financial constraints and corporate performance: An explorative network analysis and future research agenda," International Journal of Production Economics, Elsevier, vol. 216(C), pages 364-383.
    5. Ciżkowicz-Pękała Magda, 2017. "Trade credit: a benefit to get, a “must” to give? Motives behind trade credit use in Poland," Financial Internet Quarterly (formerly e-Finanse), Sciendo, vol. 13(4), pages 54-66, December.
    6. Afrifa, Godfred Adjapong & Tingbani, Ishmael & Adesina, Oluseyi Oluseun, 2022. "Stochastic frontier modelling of working capital efficiency across Europe," Technological Forecasting and Social Change, Elsevier, vol. 184(C).

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