IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v44y1998i9p1167-1178.html
   My bibliography  Save this article

Efficient Sourcing and Debt Financing in Imperfect Product Markets

Author

Listed:
  • Venkat Subramaniam

    (A. B. Freeman School of Business, Tulane University, New Orleans, Louisiana 70118)

Abstract

Supplier relations play an important role in determining a firm's product market strategy and position, by affecting the cost and quality of the product produced by the firm. These relations are especially significant because the cost of purchased materials for an average firm is more than half its total sales. In this paper, we model the adverse incentives of a firm that sources from a competitive supplier industry. We show that a firm's propensity to behave opportunistically towards its suppliers raises the firm's input costs by decreasing the number of suppliers servicing it. This results in a suboptimal production decision compared to the firm's first best choice. We argue that an appropriate level of debt financing alters the shareholder incentives and mitigates the hold-up problem. Further, we also show that at the optimal debt level, the firm produces its first best level of output.

Suggested Citation

  • Venkat Subramaniam, 1998. "Efficient Sourcing and Debt Financing in Imperfect Product Markets," Management Science, INFORMS, vol. 44(9), pages 1167-1178, September.
    • Handle: RePEc:inm:ormnsc:v:44:y:1998:i:9:p:1167-1178
    DOI: 10.1287/mnsc.44.9.1167
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.44.9.1167
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.44.9.1167?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Vojislav Maksimovic, 1988. "Capital Structure in Repeated Oligopolies," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 389-407, Autumn.
    2. Debra J. Aron, 1991. "Using the Capital Market as a Monitor: Corporate Spinoffs in an Agency Framework," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 505-518, Winter.
    3. Leland, Hayne E, 1972. "Theory of the Firm Facing Uncertain Demand," American Economic Review, American Economic Association, vol. 62(3), pages 278-291, June.
    4. Maksimovic, Vojislav, 1990. "Product Market Imperfections and Loan Commitments," Journal of Finance, American Finance Association, vol. 45(5), pages 1641-1653, December.
    5. Brander, James A. & Lewis, Tracy R., 1986. "Oligopoly and Financial Structure: The Limited Liability Effect," American Economic Review, American Economic Association, vol. 76(5), pages 956-970, December.
    6. Helper, Susan & Levine, David I, 1992. "Long-Term Supplier Relations and Product-Market Structure," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 8(3), pages 561-581, October.
    7. Fulghieri, Paolo & Nagarajan, S., 1992. "Financial contracts as lasting commitments: The case of a leveraged oligopoly," Journal of Financial Intermediation, Elsevier, vol. 2(1), pages 2-32, March.
    8. von Ungern-Sternberg, Thomas, 1988. "Excess Capacity as a Commitment to Promote Entry," Journal of Industrial Economics, Wiley Blackwell, vol. 37(2), pages 113-122, December.
    9. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    10. Kleindorfer, Paul & Knieps, Gunter, 1982. "Vertical integration and transaction-specific sunk costs," European Economic Review, Elsevier, vol. 19(1), pages 71-87.
    11. Helper, Susan, 1991. "Strategy and Irreversibility in Supplier Relations: The Case of the U.S. Automobile Industry," Business History Review, Cambridge University Press, vol. 65(4), pages 781-824, January.
    12. Campbell, Tim S & Kracaw, William A, 1990. "Corporate Risk Management and the Incentive Effects of Debt," Journal of Finance, American Finance Association, vol. 45(5), pages 1673-1686, December.
    13. Dasgupta, Sudipto & Sengupta, Kunal, 1993. "Sunk Investment, Bargaining and Choice of Capital Structure," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 203-220, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Claudio Piga, 2002. "Debt and Firms' Relationships: The Italian Evidence," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 20(3), pages 267-282, May.
    2. T. Franck & N. Huyghebaert, 2004. "On the Interactions between Capital Structure and Product Markets.A Survey of the Literature," Review of Business and Economic Literature, KU Leuven, Faculty of Economics and Business (FEB), Review of Business and Economic Literature, vol. 0(4), pages 727-787.
    3. Brett W. Myers & Alessio Saretto, 2016. "Does Capital Structure Affect the Behavior of Nonfinancial Stakeholders? An Empirical Investigation into Leverage and Union Strikes," Management Science, INFORMS, vol. 62(11), pages 3235-3253, November.
    4. Fraja, Gianni De & Piga, Claudio A. G., 2004. "Strategic debt in vertical relationships: theory and evidence," Research in Economics, Elsevier, vol. 58(2), pages 103-123, June.
    5. Serel, Dogan A. & Dada, Maqbool & Moskowitz, Herbert, 2001. "Sourcing decisions with capacity reservation contracts," European Journal of Operational Research, Elsevier, vol. 131(3), pages 635-648, June.
    6. Volodymyr Babich, 2006. "Vulnerable options in supply chains: Effects of supplier competition," Naval Research Logistics (NRL), John Wiley & Sons, vol. 53(7), pages 656-673, October.
    7. Bin Jiang, 2009. "Implementing Supplier Codes of Conduct in Global Supply Chains: Process Explanations from Theoretic and Empirical Perspectives," Journal of Business Ethics, Springer, vol. 85(1), pages 77-92, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Abdulaziz Istaitieh & José M. Rodríguez‐Fernández, 2006. "Factor‐product markets and firm's capital structure: A literature review," Review of Financial Economics, John Wiley & Sons, vol. 15(1), pages 49-75.
    2. Kale, Jayant R. & Ryan, Harley E. & Wang, Lingling, 2019. "Outside employment opportunities, employee productivity, and debt discipline," Journal of Corporate Finance, Elsevier, vol. 59(C), pages 142-161.
    3. Zechner, Josef, 1996. "Financial market-product market interactions in industry equilibrium: Implications for information acquisition decisions," European Economic Review, Elsevier, vol. 40(3-5), pages 883-896, April.
    4. Rosellon Cifuentes, M.A., 1999. "Essays on financial policy, liquidation values and product markets," Other publications TiSEM 802f644e-3e93-4815-bf33-8, Tilburg University, School of Economics and Management.
    5. Istaitieh, Abdulaziz & Rodriguez-Fernandez, Jose M., 2006. "Factor-product markets and firm's capital structure: A literature review," Review of Financial Economics, Elsevier, vol. 15(1), pages 49-75.
    6. Engelbert J. Dockner & Helmut Elsinger & Andrea Gaunersdorfer, 2018. "The Strategic Role of Dividends and Debt in Markets with Imperfect Competition," Dynamic Games and Applications, Springer, vol. 8(3), pages 601-619, September.
    7. Susan Helper, 1995. "Supplier Relations and Adoption of New Technology: Results of Survey Research in the U.S. Auto Industry," NBER Working Papers 5278, National Bureau of Economic Research, Inc.
    8. Spagnolo, Giancarlo, 1998. "Debt as a (Credible) Collusive Device, or: "Everybody Happy but the Consumer"," SSE/EFI Working Paper Series in Economics and Finance 243, Stockholm School of Economics, revised 01 Aug 2004.
    9. Jing Chen, 2005. "Imperfect Market or Imperfect Theory: A Unified Analytical Theory of Production and Capital Structure of Firms," Finance 0509009, University Library of Munich, Germany.
    10. Matthew J. Clayton, 1996. "Debt, Investment, and Product Market Competition," New York University, Leonard N. Stern School Finance Department Working Paper Seires 96-21, New York University, Leonard N. Stern School of Business-.
    11. Frank Schuhmacher, 2001. "Verhandlungssichere Finanzierungsverträge im Dyopol," Schmalenbach Journal of Business Research, Springer, vol. 53(2), pages 127-154, March.
    12. MacMinn Richard D., 2005. "On Corporate Risk Management and Insurance," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 1(1), pages 1-24, June.
    13. Ryen, Glen T. & Vasconcellos, Geraldo M. & Kish, Richard J., 1997. "Capital structure decisions: What have we learned?," Business Horizons, Elsevier, vol. 40(5), pages 41-50.
    14. Matthew J. Clayton, 1999. "Debt, Investment, and Product Market Competition," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-056, New York University, Leonard N. Stern School of Business-.
    15. Neff, Cornelia, 1997. "Finanzstruktur und strategischer Wettbewerb auf Gütermärkten," Tübinger Diskussionsbeiträge 89, University of Tübingen, School of Business and Economics.
    16. Giacinta Cestone, 1999. "Corporate Financing and Product Market Competition: An Overview," CSEF Working Papers 18, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    17. Susan Helper & Mari Sako, 2010. "Management innovation in supply chain: appreciating Chandler in the twenty-first century," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 19(2), pages 399-429, April.
    18. Franck, Bernard & Le Pape, Nicolas, 2008. "The commitment value of the debt: A reappraisal," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 607-615, March.
    19. Fulghieri, P. & Nagarajan, S., 1996. "On the strategic role of high leverage in entry deterrence," Journal of Banking & Finance, Elsevier, vol. 20(1), pages 1-23, January.
    20. Le Pape, Nicolas, 2001. "Endettement des firmes et comportements de rivalité : l’apport des principaux modèles en économie industrielle," L'Actualité Economique, Société Canadienne de Science Economique, vol. 77(2), pages 281-302, juin.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:44:y:1998:i:9:p:1167-1178. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.