Buyer-Supplier Networks and Aggregate Volatility

This chapter investigates the structure and evolution of customer–supplier networks in Japan using a unique dataset that contains information on customer and supplier linkages for over 500,000 incorporated non-financial firms for the 5 years from 2008 to 2012. We find, first, that the number of customer links is unequal across firms: the customer link distribution has a power-law tail with an exponent of unity (i.e., it follows Zipf’s law). We interpret this as implying that competition among firms to acquire new customers yields winners that attract a large number of customers, as well as losers that end up with fewer customers. We also show that the shortest path length for any pair of firms is, on average, 4.3 links. Second, we find that link switching is relatively rare. Our estimates indicate that 92 % of customer links and 93 % of supplier links survive each year. Third and finally, we find that firm growth rates tend to be more highly correlated the closer two firms are to each other in a customer–supplier network (i.e., the smaller is the shortest path length for the two firms). This suggests that a non-negligible portion of firm growth fluctuations stem from the propagation of microeconomic shocks—shocks that affect a specific firm—through the customer–supplier chains.