Price timing and financing strategies for a capital-constrained supply chain with price-dependent stochastic demand

Abstract

We investigate the pricing timing strategy in the context of trade credit (TC), under which the capital-constrained retailer applies for deferred payments from its supplier. Based on the wholesale price offered by the supplier, the retailer determines the order volume before observing the random demand and the selling price after observing it (a.k.a., price postponement). We formulate the Stackelberg game to show how their equilibrium decisions and profits are affected by: the pricing timing, financing mode, the demand structure. In a multiplicative demand framework, the analytical and numerical results indicate that TC alleviates double marginalization problem, depending on price timing and demand structure. With the traditional bank finance (BF) as a benchmark, the supplier is reluctant to provide TC to the retailer without postponement when the market is extremely sensitive to price. Postponement not only benefits both members, but also enhances retailer’s repayment ability and thus participants’ preference for TC. They can reach an agreement on utilizing price postponement and trade credit as long as the supplier choose a suboptimal wholesale decision for deferred payment that is slightly lower the optimal one. We further extend our results to consider the additive demand structure.