The free riding of trade credit: analyses of strategic complements versus strategic substitutes

Building on game theory and literature on strategic interactions, we study how the mode of rivals’ interactions (strategic substitutes vs. strategic complements) affect the free riding of trade credit in product markets. We find that free riding weakens the effectiveness of trade credit in product market competition, thus lowering its market value. Additionally, free riding is more common among strategic substitutes than strategic complements. We also find that suppliers of substitutable goods are more susceptible to rivals’ free riding whereas such exposure is reduced when suppliers have market power or form close ties with large customers. Finally, we show that both trade credit provision and trade credit value have declined since 2000. This finding supports the decision to hoard cash in lieu of offering trade credit by U.S. firms in recent decades.