Cheap Trade Credit and Competition in Downstream Markets

Using an unique matched dataset of customers and suppliers, 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 numbers of other customers. Differently from price discounts, trade credit can target infra-marginal units and does not lower the marginal cost of the high-bargaining-power customers. In equilibrium, the latter do not steal market share from the competitors and the supplier can preserve pro table 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. Our results are not driven by differences in suppliers' ability to provide trade credit, customer specific shocks or other endogenous location decisions.