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Cheap Trade Credit and Competition in Downstream Markets

Author

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  • Giannetti, Mariassunta
  • Serrano-Velarde, Nicolas
  • Tarantino, Emanuele

Abstract

Using a unique dataset with information on 20 million inter-firm transactions, we provide evidence that suppliers offer trade credit to high-bargaining-power customers to ease competition in downstream markets in which they have a large number of other clients. Differently from price discounts, trade credit targets infra-marginal units and does not lower the marginal cost of high-bargaining-power customers. As a consequence, the latter do not gain market share and the supplier can preserve profitable sales to low-bargaining-power customers. We show that empirically trade credit is not monotonically increasing in past purchases, as is consistent with our conjecture that it targets infra-marginal units. In addition, the supplier grants trade credit to high-bargaining-power-customers only when it fears the cannibalization of sales to other low-bargaining-power clients. Our results are not driven by differences in suppliers' ability to provide trade credit, customer-specific shocks, or endogenous location decisions.

Suggested Citation

  • Giannetti, Mariassunta & Serrano-Velarde, Nicolas & Tarantino, Emanuele, 2018. "Cheap Trade Credit and Competition in Downstream Markets," CEPR Discussion Papers 13228, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13228
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    References listed on IDEAS

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    Cited by:

    1. Bryan Hardy & Felipe Saffie, 2019. "From carry trades to trade credit: financial intermediation by non-financial corporations," BIS Working Papers 773, Bank for International Settlements.

    More about this item

    Keywords

    Competition; input prices; Supply Chains; trade credit;

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • G3 - Financial Economics - - Corporate Finance and Governance
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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