Firm Performance and Asymmetry of Supplier and Customer Relationships

This paper examines how transaction relationships are correlated with firm performance focusing on differences between supplier and customer relationships. In theory, both suppliers and customers positively affect sales and profit but their channels are different. A supplier set affects a firm's productivity lowering its marginal cost of production whereas a customer set only expands the size without affecting productivity. We consider a simple model of production with intermediate inputs, and examine whether theoretical implications are consistent with empirical evidence by estimating panel regressions using Japanese inter-firm transaction network data. We find that sales elasticities of in- and out-degree are positive. In- and out-degrees exhibit complementarity on sales implying that the marginal benefit of having more suppliers increases with the number of customers, and vice versa. Also, the elasticity of in-degree increases with size while that of out-degree is constant. This is also consistent with the theory, which predicts a leveraged effect of lowering a marginal cost when the scale is large.