Captive Suppliers? What Low Supplier Prices Really Mean in Global Supply Chains

Why It Matters

Understanding whether low prices reflect value creation or extraction determines the right policy levers to protect small suppliers and improve equity in global value chains.

Key Takeaways

• Agreements embed insurance, not pure buyer extraction.
• Spot suppliers charge ~7% above cost, limit buyer threats.
• Integration reduces spot purchases, not agreement prices.
• Small suppliers face up to 6.7% discount from buyers.
• Policies should improve profit‑smoothing for tiny firms.

Pulse Analysis

Buyer power in export‑oriented supply chains often manifests as either a market‑friction mitigation tool or a surplus‑capture device. In the Indian garment industry, large buyers provide trade credit and insurance to regular fabric suppliers, embedding the cost of profit‑stability into the price. This arrangement generates a U‑shaped pricing curve that reflects the supplier’s need for smooth earnings rather than a pure extraction of value. By separating the insurance component from the observed discount, researchers can isolate the true surplus captured by the buyer.

The study’s granular data on 35,000 fabric transactions reveal that integration—building an in‑house mill—does not force lower prices on agreement suppliers. Instead, the buyer leverages its internal capacity to shrink the reliance on spot suppliers, who charge roughly 7% above cost and act as a price ceiling. Because spot suppliers can walk away without penalty, the buyer’s threat of replacement loses credibility, limiting surplus capture. This dynamic contrasts with theoretical models that predict steep price cuts when buyers gain vertical integration power.

Policy implications are clear: interventions should focus on enhancing small firms’ ability to smooth profits, such as expanding access to credit, fostering cooperative risk‑pooling, or offering tailored insurance products. By addressing the root source of buyer power—the role of the buyer as the de‑facto insurer—policymakers can improve both efficiency and equity in low‑ and middle‑income country supply chains. Such measures not only protect vulnerable suppliers but also strengthen the overall resilience of global garment value chains.