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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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    Cited by:

    1. Manuel Adelino & Miguel A Ferreira & Mariassunta Giannetti & Pedro Pires, 2023. "Trade Credit and the Transmission of Unconventional Monetary Policy," The Review of Financial Studies, Society for Financial Studies, vol. 36(2), pages 775-813.
    2. Srivastava, Jagriti & Gopalakrishnan, Balagopal, 2021. "In-kind financing during a pandemic: Trade credit and COVID-19," MPRA Paper 111433, University Library of Munich, Germany, revised Dec 2021.
    3. Zhang, Jiping & Mo, Haimiao & Hu, Zhijian & Zhang, Tianjiao, 2024. "The effect of stability and concentration of upstream and downstream relationships of focal firms on two-level trade credit," International Journal of Production Economics, Elsevier, vol. 270(C).
    4. Panagiotis Avramidis & George Pennacchi & Konstantinos Serfes & Kejia Wu, 2022. "The Role of Regulation and Bank Competition in Small Firm Financing: Evidence from the Community Reinvestment Act," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(8), pages 2301-2340, December.
    5. Alvaro Garcia-Marin & Santiago Justel & Tim Schmidt-Eisenlohr, 2019. "Trade Credit, Markups, and Relationships," CESifo Working Paper Series 7600, CESifo.
    6. Haoyu Gao & Peixuan Zhao & Huiyu Wen, 2023. "How does credit information sharing affect trade credit? Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(5), pages 4909-4938, December.
    7. Ersahin, Nuri & Giannetti, Mariassunta & Huang, Ruidi, 2024. "Trade credit and the stability of supply chains," Journal of Financial Economics, Elsevier, vol. 155(C).
    8. Huang, Wei & Goodell, John W. & Xia, Qing & Yuan, Shuai, 2024. "Trade credit provision and innovation: A strategic trade-off," International Review of Financial Analysis, Elsevier, vol. 94(C).
    9. Ding, Feng & Liu, Qiliang & Shi, Hanzhong & Wang, Wenming & Wu, Shan, 2023. "Firms' access to informal financing: The role of shared managers in trade credit access," Journal of Corporate Finance, Elsevier, vol. 79(C).
    10. Jagriti Srivastava & Balagopal Gopalakrishnan, 2021. "In-kind financing during a pandemic: Trade credit and COVID-19," Working papers 473, Indian Institute of Management Kozhikode.
    11. 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.
    12. Costello, Anna M. & Minnis, Michael & Rabinovich, Irina, 2024. "Discrimination in the payments chain," Journal of Financial Economics, Elsevier, vol. 158(C).
    13. Vivek Astvansh & Niket Jindal, 2022. "Differential Effects of Received Trade Credit and Provided Trade Credit on Firm Value," Production and Operations Management, Production and Operations Management Society, vol. 31(2), pages 781-798, February.
    14. Wang, Wenya & Xu, Qiyu & Yang, Ei, 2024. "Bargaining power and trade credit: The heterogeneous effect of credit contractions," Journal of Banking & Finance, Elsevier, vol. 161(C).

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    More about this item

    Keywords

    Trade credit; Competition; Input prices; Supply chains;
    All these keywords.

    JEL classification:

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

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