Relationships, Risk and Rents: Evidence from a Market for Ice

Thursday, 22 June, 2017
Firms frequently engage in repeated trade despite the availability of alternative business partners. A large literature shows how such relationships affect market outcomes, but less is known about how changes in market structure affect these relationships. In this paper Ghani and Reed (2017) study a market for an intermediate input - ice - in which customers - fi shermen - are regularly loyal to retailers, who prioritize loyal customers for deliveries when supply is scarce from the monopolistic manufacturer. When entry of additional manufacturers reduces supply risk, retailers can no longer extract loyalty as a rent to abate the risk and switching between customers and retailers becomes more common. Retailers respond by expanding trade credit to customers, particularly previously loyal ones. The authors interpret this as evidence that supply risk and demand volatility can contribute to loyalty in relationships, particularly in developing countries. Further, they show that entry into ice manufacturing leads to substantial improvements in fishermen's productivity and reductions in the consumer price of fi sh, indicating that increased competition in low income economies can lead to improvements in productivity and welfare.