The Theory of Corporate Finance by Jean Tirole

Author:Jean Tirole [Tirole, Jean]
Language: eng
Format: epub, pdf
ISBN: 978-1-4008-3022-0
Publisher: Princeton University Press
Published: 2006-03-06T22:00:00+00:00

7.1.2.2 Committing vis-à-vis Suppliers or Customers

Until now we have focused on the interaction between financial structure and product-market competition. The design of the financial structure may also be used to alter the behavior of complementors in the vertical chain, rather than that of the producers of substitutes. A series of papers (Bronars and Deere 1991; Perotti and Spier 1993; Spiegel 1996; Spiegel and Spulber 1994) has argued in various settings that leverage can be used as a commitment to be tough in bargaining over conditions of trade. This insight is usually based on the following premises:31

(a) the firm will in the future negotiate with a third party over, say, a transfer price;

(b) the negotiation will be conducted by the entrepreneur (or more generally by the entrepreneur and a class of investors such as shareholders, as long as other interested claimholders are not part of the renegotiation);

(c) this third party has some bargaining power in the renegotiation, perhaps because of an existing relationship or because of institutional (regulatory) constraints on bargaining processes (the one case that is excluded by this assumption is the case in which the entrepreneur has full bargaining power, i.e., is able to make a take-it-or-leave-it offer to the third party).

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