Ongoing, massive liquidity injections by the U.S. central bank are raising fears of significant long run inflation and, with it, questions about the likely economic impact. Studies based on representative agent models of the U.S. economy generally point to a negative, monotonic association between long run inflation and social welfare. Put simply, most study finds that a representative household would trade off some consumption for zero inflation, though the deadweight loss from moderate inflation quantitatively amounts to a fraction of one percent of consumption. Hence, from the vantage point of a representative agent the optimal policy prescription is non-inflationary, and departures from this policy are not very costly.
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Relationships with major customers are conventionally considered to be an impediment to supplier firm performance. Reportedly, major customers pressure their dependent suppliers to provide concessions such as lowering prices, extending trade credit, accelerating delivery times, and carrying extra inventory. The popular press often highlights the “evils” of customer-base concentration by reference to the case of Wal-Mart and its history of squeezing out every last penny from its dependent suppliers (e.g., PBS Frontline 2004). However, research on relationship marketing and operations management suggests that suppliers to major customers may be able to achieve efficiencies in the form of decreased selling and administrative expenses, and enhanced product distribution (e.g., Jackson 1985; Cowley 1988; Kalwani and Narayandas 1995). In addition, major customer relationships can foster information sharing along the supply chain and help supplier firms streamline production and enhance working capital management (e.g., Kalwani and Narayandas 1995; Kinney and Wempe 2002).
In this paper, I examine whether and how customer-base concentration affects supplier firm performance and stock market valuation. To this end, I compile a comprehensive sample of supply chain relationships in virtually all two-digit SIC industries over the thirty-year period from 1977 to 2006, and introduce a measure to capture at the firm-year level the extent to which a supplier?s customer base is concentrated. My concentration measure, labeled CC, is an application of the Herfindahl-Hirschman index and encompasses two elements of customer-base diversification ? namely, the number of major customers with which a supplier firm interacts and the relative importance of each major customer in the firm?s annual revenue.
