Abstract
We conjecture that suppliers offer 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 using trade credit. Empirically, we find that suppliers grant trade credit to high-bargaining-power customers when they fear the cannibalization of sales to other 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. © 2021 by The University of Chicago. All rights reserved.