The Platform’s Credit-Offering Strategy in the Presence of Integrated and Independent Systems

Abstract

Credit purchasing has seen dramatic growth recently, requiring retailers to adapt their operations in response to an online platform’s strategic credit offering. This article presents a model for exploring the platform’s strategy for offering credit and the retailer’s response, considering consumer spillover, that is, how much the benefit of credit outweighs the drawbacks. The consumers differ in their disposable personal incomes and valuations for the product, and they may perceive a spillover from the credit. We study an integrated system, where the platform acts as a retailer and determines the credit-offering strategy and the price simultaneously. We find that the platform will offer credit only when the spillover is above a given negative threshold, and will charge an interest rate for credit only when the spillover is positive. In addition, the price exhibits a nonmonotonic change with the credit spillover, but the demand remains unchanged at a high level. We then extend the analysis to an independent system, where the retailer sells through the platform. We find that the revenue-sharing percentage the retailer pays is critical for the platform to optimize its credit strategy. Specifically, the platform will never offer interest-free credit when the percentage is low, but in other cases may do so and the credit offering does not harm the retailer’s profit. Interestingly, when the spillover is moderate, the demand may decrease instead of increase, indicating a deviation from the presumed intention of offering credit.

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