Financing the price-setting newsvendor with sales effort

Abstract

In this paper, we consider the financing issues in a supply chain where the capital-constrained retailer should use limited funds to pay for both order and sales. The retailer decides the retail price, order quantity exante and sales effort expost, and he supports these operational activities by two financing sources: bank loan and trade credit. We illustrate that in this two-stage problem, the price-setting retailer's equilibrium sales effort and retail price are both related to the market realization value and the retailer's cash level. These two financing sources are both able to stimulate the retailer to promote sales. If the retailer's cash level is reasonably high, both parties (supplier and retailer) benefit from trade credit. By contrast, if the retailer's cash level is low, trade credit may discourage the retailer from sales promotion. Counterintuitively, our study shows that the retailer spends more on sales when the market is good than when it is bad.