Financing decisions in a supply chain with a capital-constrained manufacturer as new entrant

Abstract

We examine financing and pricing decisions in a supply chain in which a common retailer is supplied by an incumbent manufacturer and a capital-constrained new entrant manufacturer. We identify the conditions under which the retailer should offer financing directly to the new entrant manufacturer, and show how the retailer sets an interest rate that is either forward-looking or short-sighted. We provide a decision scheme for the new entrant manufacturer, who must choose either retailer financing (RF) or bank financing (BF), depending on conditions. We consider two types of retailers, forward-looking (F-retailer) and short-sighted (S-retailer). We show that a retailer offers RF when its risk-free interest rate is lower than the bank's interest rate. An S-retailer sets its interest rate at the risk-free interest rate or at a threshold interest rate (higher than the risk-free interest rate), while an F-retailer should set its interest rate at a threshold interest rate that is lower than that of the bank and may be lower than the risk-free interest rate. The new entrant manufacturer should adopt the RF scheme if RF is available. We also discuss how the capital-constrained new entrant influences competition in the supply chain, and how the incumbent manufacturer's brand power influences the retailer's financing decision. Numerical examples are included to illustrate the major results.