Customer-Base Concentration, Profitability and the Information Environment: The U.S. Government as a Major Customer

Abstract

While prior research focuses on a firm’s relationships with corporate customers, we examine a firm’s interaction with the U.S. government as a unique and important customer. Specifically, we compare government customers vis-a-vis corporate customers by investigating their different economic implications for supplier firms. The evidence suggests that firms with more concentrated sales to government customers exhibit greater economies of scale as reflected in their better profitability, whereas firms with more concentrated sales to corporate customers do not. Our further analyses imply that relative to corporate customers, government customers help suppliers in achieving higher efficiencies in asset turnover and customer-specific SG&A investments, a consequence of lower operational uncertainty and a more transparent external information environment.