Supply Chain Shortages, Market Power, and Inflation

We conjecture that suppliers favor customers accounting for a larger share of their revenues during supply chain shortages. This favoritism generates asymmetric cost shocks that reallocate market share and raise markups for important customers. We find support for this hypothesis at different aggregation levels: suppliers allocate disproportionately more shipments to important customers during delivery delays; these firms gain market share, earn higher markups, and experience superior stock returns; and ex ante concentrated industries with less elastic demand experience the strongest inflationary impulses. The supplier-favoritism channel could explain about 20% of realized U.S. CPI inflation in 2021.