The product differentiation hypothesis for corporate trade credit
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.
Volume (Year): 24 (2003)
Issue (Month): 6-7 ()
|Contact details of provider:|| Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Emery, Gary W., 1987. "An Optimal Financial Response to Variable Demand," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(02), pages 209-225, June.
- Schwartz, Robert A., 1974. "An Economic Model of Trade Credit," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(04), pages 643-657, September.
- Shehzad L. Mian & Clifford W. Smith, 1994. "Extending Trade Credit And Financing Receivables," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(1), pages 75-84.
- Jeffrey H. Nilsen, 1999.
"Trade Credit and the Bank Lending Channel,"
99.04, Swiss National Bank, Study Center Gerzensee.
- Jain, Neelam, 2001. "Monitoring costs and trade credit," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(1), pages 89-110.
- Biais, Bruno & Gollier, Christian, 1997. "Trade Credit and Credit Rationing," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 903-37.
- repec:tpr:qjecon:v:96:y:1981:i:2:p:243-70 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:wly:mgtdec:v:24:y:2003:i:6-7:p:457-469. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.