Firms’ introduction of internet-based installment: Incremental demand vs. cash opportunity cost

Abstract

Installment services such as Amazon Pay EMI, Ant Credit Pay, and ZestMoney EMI are internet-based financial innovations, which have been more and more widely offered by e-commerce firms. Undoubtedly, installment helps attract customers by allowing them to “buy now and pay later”. However, firms have to undertake the cash opportunity cost because the actual payment is triggered some days/months later, without any interest in the grace period. In this paper, we build a chain-to-chain competition model comprising of a reselling platform (e.g., Amazon.com), an agent selling platform (e.g., Taobao.com) and their exclusive suppliers, to investigate whether the reselling platform and the supplier on the agent selling platform have incentives to provide installment services. Interestingly, we find that, when the incremental demand is in a moderate range, there exists an asymmetric equilibrium where the reselling platform provides installment services while the supplier on the agent selling platform does not. Regarding the wholesale price for the reselling platform, we find the supplier may determine a lower or higher wholesale price when the reselling platform provides installment services, depending on the volume of the incremental demand. We further study the impact of tariff cost, product substitutability, amount limitation, correlation between price and incremental demand and uncertainty of exchange rate for installment to verify the robustness of the main findings.