“Trade vs. Bank Credit and Supplier Competition” by Dr. Jiri CHOD
Dr. Jiri CHOD
Associate Professor in Operations Management Department
Carroll School of Management
This article examines how product market competition affects firms' willingness to offer trade credit. We consider M financially constrained retailers each of whom sources from each of N suppliers. By offering trade credit, any given supplier relaxes the retailers’ financial constraints, which automatically benefits the other suppliers. This free-riding problem is detrimental to the supplier providing trade credit especially when the other suppliers offer similar products, and therefore, compete not only for financing, but also for end customers.
Our model helps to explain, among other, why suppliers of standardized goods extend less trade credit than suppliers of differentiated products. In addition, our model predicts and empirically validates a negative relation between a firm's reliance on trade credit and the number of its suppliers.