Competition and Inter-Firm Credit: Theory and Evidence from Firm-level Data in Indonesia

Using firm-level data we investigate the relationship between trade credit and suppliers’ market structure and find an inverted U-shaped relationship between competition and trade credit, with a discontinuous increase in credit provision between monopoly and duopoly. This “big jump” arises because monopolists are more likely to not offer any trade credit than firms in competitive environments. Our model exploits the fundamentally different nature between cash and trade credit sales, arguing that firms are unable to commit ex ante to a trade credit price. We show that monopolists will often sell only on cash, while credit is always provided in competitive environments.