Trade Credit and Product Pricing: The Role of Implicit Interest Rates

Abstract

We empirically investigate the proposition that firms charge premia on cash prices in transactions involving trade credit. Using a comprehensive panel data set on product-level transaction prices and firm characteristics, we relate trade credit issuance to price setting. In a recession characterized by tightened credit conditions, we find that prices increase significantly more on products sold by firms issuing more trade credit, in response to higher opportunity costs of liquidity and counterparty risks. Our results thus demonstrate the importance of trade credit for price setting and show that trade credit issuance induces a channel through which financial conditions affect prices.

Inventory Replenishment Policies for Two Successive Generations of Technology Products Under Permissible Delay in Payments

“…The win-win credit terms between the buyer and seller can also help in overcoming the disruptions in the supply chains (Filbeck and Zhao, 2020). In a recessionary environment that is characterized by an increased liquidity crunch and the higher opportunity cost of liquidity risk, the trade credits may also influence the product price to cover up for that opportunity cost (Amberg et al 2021).…”