Manufacturer’s channel selection in a capital-constrained supply chain under bargaining game

Abstract

In the context of a capital-constrained supply chain, we examine how a direct channel added by a manufacturer influences the players’ optimal decisions and profits under bargaining game. The capital-constrained retailer adopts a type of hybrid financing scheme including bank credit and equity financing to alleviate its capital shortage. We characterize the equilibrium results under different sales channels, and examine the impacts of the bank loans ratio and bargaining power on the players’ optimal decisions. The conditions of the equilibrium channel choices are derived. We find that if the retailer’s bank loans ratio in the retail channel is beyond a certain threshold, a dual-channel structure can enhance the profits of the manufacturer and supply chain. The retailer, however, will benefit from the direct channel when its bank loans ratio in the retail channel is below a certain threshold. We further demonstrate that a dual-channel structure can reduce the degree of double marginalization of the overall supply chain. In addition, to solve the potential channel conflict, a bilateral payment mechanism is developed to achieve Pareto improvement for both players. Numerical examples are included to illustrate the major results of the paper.