Two-Sided Market Power and Firm Performance

We examine the effects of demand-side (product market) and supply-side (supply chain) market power on firm profitability and the ease of access to bank financing. Using granular supply-chain and bank-loan information, we empirically demonstrate that both demand-side and supply-side power are associated with higher profitability and greater provisions for bank financing. However, product-market power appears to be marginally more beneficial than supply-chain power. Furthermore, the association between power and performance is non-linear and power beyond an optimal threshold can adversely impact performance. We show that the key insights of our analyses remain robust irrespective of alternative measures of performance, market power, and the nature of customer–supplier interactions. Using a game-theoretic analytical framework, we capture analytical insights consistent with our empirical findings. The novelty of our analyses is in showcasing that firm power emanating from both the demand-side and supply-side operations can significantly ameliorate performance and alleviate external financing constraints