Abstract
Although reliance on major customers has been growing over time, the literature has been largely silent on the determinants of customer base structure. This paper shows that low levels of product market competition in the customer industry is one important factor that can encourage supplier firms to establish relationship with major customers, and enhance existing ones. In support of the argument, we find that the fraction of suppliers’ total sales to major customers is positively associated with customer industry product market concentration. We argue that the recent increase in concentration of customer industries could have increased reliance on major customers.
1. Introduction
Existing literature demonstrates that customer-supplier links are important determinants of the operating environment for many firms, enhancing profitability and efficiency (Patatoukas, 2012; Irvine et al., 2016), but also creating pressure to reduce prices and engage in customer-specific investment (e.g., Fee and Thomas, 2004; Dhaliwal et al. 2016). Although the benefits and costs of reliance on major customers are still subject to a debate, a robust stylized fact is that customer concentration has grown over the past several decades (Patatoukas, 2012; Irvine et al., 2016). Yet, the literature has been largely silent on what motivates supplier firms to form a concentrated customer base.
5. Conclusion
This study explores the impact of customer industry market structure on supply-chain links. We predict that the reliance on major customers is more pronounced in firms that sell to customers operating in the environment of low product market competition. Using sales-weighted customer industry HHI index we show that when customer competition is low, suppliers condense their customer network by selling to a less disperse customer base. Other tests are also consistent with our main hypothesis.
