Equilibrium evolution in a two-echelon supply chain with financially constrained retailers: The impact of equity financing

Abstract

This paper considers a two-echelon supply chain that has a supplier and two capital constrained retailers and in which the retailers compete in a Cournot fashion. We study the impact of external financing on the players’ optimal decisions and supply chain performance. We show that as competition intensity increases, the supplier (as the Stackelberg leader) may consider merging with one retailer to avoid double marginalization. Yet, the deselected retailer may utilize external financing to return to the supply chain. We explicitly model the evolution of equilibrium scenarios and identify the conditions under which the supplier may prefer to provide trade credit to only one retailer and the other retailer may use external financing. We also carry out extensive sensitivity analyses with respect to a retailer’s capital structure and the retailer’s competition intensity.