Abstract
Financial structure may affect output market competition. This paper analyses the strategic role played by trade credit in the determination of firms' competitive position. In a market structure in which trade relations between suppliers and retailers are governed by exclusive distribution, we show that trade credit may reduce conflicts of interest between shareholders and debt holders, and make firms compete less aggressively in the output market. We verify the empirical relevance of this strategic explanation of trade credit extension, with a sample of 40,000 couples of suppliers and clients.
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