Do incumbent supplier firms facing increased threat of entry by competitors adjust trade credit to respond to such threats? Threatened incumbent supplier firms may extend more trade credit, ex-ante, to defend their market power, or they may reduce trade credit as enforcement of such informal credit contracts is expected to become more difficult with the expected decline in market power. I test these contrasting predictions by exploiting plausibly exogenous, staggered removals of product level entry barriers for Indian manufacturing firms, and find that an average incumbent supplier firm extends 10% more trade credit with increased threat of entry, supporting the first hypothesis. My results are particularly strong for firms manufacturing differentiated products, where reduction...[ Read more ]

Do incumbent supplier firms facing increased threat of entry by competitors adjust trade credit to respond to such threats? Threatened incumbent supplier firms may extend more trade credit, ex-ante, to defend their market power, or they may reduce trade credit as enforcement of such informal credit contracts is expected to become more difficult with the expected decline in market power. I test these contrasting predictions by exploiting plausibly exogenous, staggered removals of product level entry barriers for Indian manufacturing firms, and find that an average incumbent supplier firm extends 10% more trade credit with increased threat of entry, supporting the first hypothesis. My results are particularly strong for firms manufacturing differentiated products, where reduction in price mark-ups may not be an effective strategy, thereby bringing into focus the role of trade credit as a strategic tool to defend market power.