A Trade Credit Model with Asymmetric Competing Retailers

Abstract

We study a supply chain of a manufacturer selling to two asymmetric retailers engaged in inventory (order quantity) competition in the presence of demand uncertainty and an exogenously given retail price. The effective demand of each retailer includes its primary demand and reallocated demand from its competitor. We model two salient features causing asymmetry: (i) the weak retailer is capital‐constrained and (ii) the bargaining power of the dominant retailer implies that it enjoys a lower wholesale price. The manufacturer offers trade credit to the weak, capital‐constrained retailer. We show that such trade credit can be used by the manufacturer as a strategic response to the bargaining power of its dominant retailer. Computational examples reveal that under inventory competition, the capital‐constrained retailer benefits from the trade credit, leaving the dominant retailer worse off. We show that demand substitution increases the profit of the dominant retailer and the manufacturer but, somewhat surprisingly, decreases the weak retailer's profit. When both bank and trade credit are available, we show conditions under which trade credit is preferred over bank credit by the manufacturer. Compared with a trade credit with an endogenous interest rate (and an exogenously given wholesale price), a trade credit with an endogenous wholesale price (and an exogenously given interest rate) is preferred by the manufacturer, but is only preferred by the system when the weak retailer's initial working capital is small.

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