As part of the series of the "Finance Research Seminar", VGSF welcomes Mariassunta Giannetti from the Stockholm School of Economics to present her research paper.
Cheap Trade Credit and Competition in Downstream Markets
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 suppliers that have to transfer surplus to high-bargaining-power customers would want to offer an increasing price schedule to preserve sales to other buyers. Suppliers can implement this by choosing a trade credit limit up to which customers can purchase on account. This contractual feature allows suppliers to maintain high-bargaining-power customers' marginal costs high and limits competition in the downstream market. 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.