Examining the impact of market power discrepancy between supply chain partners on firm financial performance

Abstract

Market power reflects a firm's competitive advantage and plays an important role in its performance. However, in a buyer-supplier relationship, how the asymmetric market power between a firm and its partners affects the firm financial performance remains an open question. This study investigates the impact of market power discrepancy (MPD) between a focal firm and its supply chain partners on the focal firm's financial performance, as measured by return on assets (ROA). With empirical evidence from China's listed firms between 2001 and 2021, we find that a higher MPD between the firm and its supplier or the firm and its customer negatively affects the firm's financial performance. A supplier or customer that has a matched market power with the firm is the best candidate for building a relationship. In addition, our findings suggest that the strength of the buyer–supplier relationship amplifies the negative impact of MPD on the firm's financial performance, whereas the level of relationship embeddedness reduces the MPD's negative effect. Moreover, our findings suggest that firm-specific institutional, industry, and regional economic heterogeneities affect the MPD's financial impact. Further, we find that MPD not only negatively affects a firm's financial performance but also worsens its environmental, social, and corporate governance performance. Our study recommends that firms should alleviate the asymmetry of market power with their partners and leverage the relationship dependence to balance power and benefits.