Customer Market Power And The Provision Of Trade Credit; Evidence From Eastern Europe And Central Asia

Statistics show that the sale of goods on credit is widespread among firms even when they are capital constrained and thus face relatively high costs in providing trade credit. This paper provides an explanation for this by arguing that customers that possess strong market power are able to increase their customer surplus by demanding to purchase the goods on credit. This gain in customer surplus increases with the degree of asymmetric information between buyer and seller with respect to product quality. Therefore, firms that is perceived as risky are especially subject to the market power of the customer and have to sell their goods on credit.