Searching for Trade Partners in Developing Countries: Testing Firms in the 'Fast Fashion' Industry

Abstract

Our understanding of how buyers find a suitable long term supplier is limited. The author uses unique buyer-seller customs data to directly observe experimentation activity in a large market - the “fast fashion” industry in Bangladesh. The author studies how buyers of ready-made garments conduct trials of suppliers at the order-product level before settling into sustained sourcing relationships. To illustrate this process, the author uses a model of idiosyncratic search costs where the buyer’s costs of testing a manufacturer are determined by the heterogeneity of potential suppliers. The model shows that: higher supplier heterogeneity is associated with lower experimentation as heterogeneity increases, search activity falls more markedly for larger buyers than for their smaller counterparts while buyer-seller matches are positively assortative, more heterogeneous settings see all buyers -and more markedly, large buyers- willing to accept relationships with (weakly) worse suppliers. These implications are strongly supported by the data, and hold in terms of within-buyer, cross-market ifferences in experimentation behavior. Finally the author shows that these information frictions, rooted in supplier heterogeneity, matter for the distribution of rents in these relationships: price-cost margins for suppliers are positively related to the degree of heterogeneity in the environment. This research was funded under the Private Enterprise Development in Low-Income Countries (PEDL) Programme