The Value of Professional Ties in B2B Markets

We study how a particular form of social ties (i.e., professional ties proxied by past employment) affect price and profitability in business-to-business (B2B) markets. While most of the work on social ties focuses on information diffusion in business-to-consumer markets, we ask: Do B2B buyers receive higher or lower prices from sellers with whom they have a professional tie? Answering this question is challenging because it is difficult to observe B2B prices, the individual decision-makers (IDMs), and elements of differentiation that drive price variation. We resolve these challenges by leveraging confidential data from the Federal Reserve on the largest market for short-term loans with daily transactions of over $2 trillion, the repo market. In addition, we use financial disclosure laws to unmask IDMs at sellers and use LinkedIn to reveal their ties. We show that a seller IDM who is the buyer's former employee, charges the buyer, on average, 25 basis points more than other buyers with no ties. This extra expense translates into 1.6% of additional revenue for the average seller. The mechanism driving this price increase involves a reliability premium." Sellers with a professional tie to the buyer act more reliably towards the buyer in the face of supply-demand imbalances. Our work suggests professional ties can affect B2B prices beyond observable supply-demand dynamics and provide value for sellers and buyers.