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rational expectations on future sales based on available information (e.g., cost exhibits
greater stickiness during the periods of macroeconomic growth, Anderson et al., 2003) or
managerial psychological biases. Thus, some studies also provide the behavioral
explanations (Chen, Gores, and Nasev, 2013; Qin, Mohan, and Kuang, 2015).
Although many studies have examined the factors that may affect cost stickiness,
little is known about the effect of customer-supplier relationship on cost behavior. Chang,
Hall, and Paz (2017) document the negative relationship between customer concentration
and cost elasticity but the effect of customer-supplier relationship on cost stickiness is
unknown. We complement prior research by investigating the association between cost
stickiness and customer-supplier relationship.
On the one hand, conventional view of customer-supplier relationship highlights the
bargain power of buyers. This view emphasizes that buyer power exists when suppliers
depend on a concentrated set of buyers, and major customers have the power to push their
dependent suppliers to lower the prices, extend credit period, carry extra inventories, etc.
(e.g., Porter, 1974). Gosman and Kohlbeck (2009), for example, suggest that as sales to
major customer increase, the buyer power enables major customers to set the price and
extend payment period and thus they find that suppliers’ gross margins and return on
assets decrease with the increased sales to major customers. According to the bargain
power argument, in order to keep the relationship with major customers and for fear of
losing them, suppliers are likely to retain their capacity even when sales decrease,
reflecting cost stickiness behavior.
On the other hand, research on relationship marketing and operations management
provides an alternative view that, suppliers with concentrated customer bases achieve
better efficiencies by mutual collaboration on marketing and advertising efforts and more
effectiveness of selling expenditures (e.g., Cowley, 1988; Kalwani and Narayandas, 1995).
Major customer relationship also fosters information sharing and helps suppliers arrange
production and working capital more precisely and effectively (e.g., Kalwani and
Narayandas, 1995; Kumar, 1996; Ak and Patatoukas, 2016). Patatoukas (2012), using the
mandated disclosure data on major customers required by SEC and SFAS, challenges the
conventional view by providing evidences that suppliers with higher customer
concentration are positively associated with higher return on assets and lower selling,
general, and administrative (SG&A) costs. Ak and Patatoukas (2016) further find that
suppliers with more concentrated customer bases hold fewer inventories for less time and
are less likely to end up with excess inventories, as indicated by the lower likelihood and