Abstract
Trade credit can serve as a strategic tool for a supplier to influence retailer behavior in the product market. The unique structure of trade credit, a period of free financing followed by a high interest rate increases the cost of rolling over unsold goods making retailers more aggressive when demand is low. Ex-ante retailers optimally hold smaller inventories which softens competition when demand is high. The modified product market behavior induced by trade credit financing increases the producer surplus at the expense of consumers and reduces welfare in oligopoly markets.
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