Capital allocation and pricing decisions under trade credit with time-sensitive stochastic demand

Abstract

We investigate the delivery investment decision in the context of trade credit (TC), under which the retailer applies for deferred payments from its supplier. In addition to ordering procurement, the retailer must allocate limited capital to reduce delivery time, which promotes time-sensitive demand. We develop a Stackelberg game in which the supplier determines the wholesale price and then the retailer decides the delivery investment amount and order volume. The analytical results indicate that, unless the retailer is slightly capital-constrained, the retailer’s investment activity not only increases its profitability but also benefits the supplier and promotes the coordination of the supply chain. Supplier reduction in wholesale deepens the positive impact. With bank finance (BF) as a benchmark, the Pareto region that entices both parties to participate in TC exists when the investment cost is within certain limits and when the retailer is severely capital-constrained. We also provide insights on the sensitivity of participants’ profits to the capital level, delivery investment features, and other price parameters.