Template-Type: ReDIF-Paper 1.0
Title: Cheap Trade Credit and Competition in Downstream Markets
Author-Name: Mariassunta Giannetti
Author-Email: mariassunta.giannetti@hhs.se
Author-Name: Nicolas Serrano-Velarde
Author-Email: nicolas.serranovelarde@unibocconi.it
Author-Name: Emanuele Tarantino
Author-Email: tarantino@uni-mannheim.de
Classification-JEL: G3, D2, L1
Keywords: Trade credit, competition, input prices, supply chains 

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.

Note: 
Length: 62
Creation-Date: 2018-12
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp062
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2018_062