Analysis of financing strategy in coopetition supply chain with opportunity cost

Abstract

Many reports indicate that manufacturers may initially provide trade credit for a capital-constrained retailer to enhance product output. However, with the easy access to introduce a direct channel nowadays, whether the benefits of trade credit in adjusting product output still hold needs to be examined. In response to this problem, this study analyzes firms’ preferences for trade credit versus bank credit in the absence/presence of a direct channel and examines the interactions between firms’ credit and channel strategies. We find that in the absence of a direct channel, both firms prefer trade credit for a low opportunity cost; however, after introducing a direct channel, the manufacturer prefers to offer a trade credit for either (i) a low opportunity cost and a high sales cost or (ii) a high opportunity cost and a low sales cost. Comparing the two, we present that introducing a direct channel always strengthens the manufacturer’s preference for trade credit but weakens (strengthens) the retailer’s preference given a low (high) sales cost. This finding suggests that for the upstream manufacturer, trade credit becomes even more beneficial after introducing a direct channel. Moreover, relative to bank credit, trade credit weakens (strengthens) the manufacturer’s preference for introducing a direct channel yet strengthens (weakens) the retailer’s preference given a low (high) opportunity cost. We also extend our analysis to price competition, uncertain demand, and sequential quantity decisions.