Abstract

Traditional model of cost behavior assumes that cost changes proportionally with sales. However, Anderson et al. (2003) show that costs may behave sticky in the sense that costs increase in response to the increase in sales, but do not decrease proportionately when sales decrease by the equivalent amount. This study investigates whether and how relationship with major customers can affect its cost stickiness. The evidence shows that costs are less sticky for firms which have higher concentrated customer bases. Different from the conventional view, which suggests that major customers may pressure suppliers to retain resources when sales decrease and thus, increase the stickiness of cost, the study finds that suppliers have more information from their customer-supplier relationship through better information transfers along the supply chain. Suppliers are more certain about future demand, thus adjusting their costs accordingly in time. Overall, my study shows the importance of customer-supplier relationship when analyzing a firm’s cost behavior.  

Keywords

Cost behavior, Customer-supplier relationship, Customer-base concentration