Pricing, financing and channel structure for capital-constrained dual-channel supply chains with product heterogeneity

Abstract

We study the pricing, financing, and channel structure for a dual-channel supply chain in which a capital-constrained manufacturer sells two heterogeneous products through a retailer’s retail channel and its own direct channel. In line with industry practice, we explicitly examine the efficacy of three financing strategies – that is, early payment financing (EPF), bank financing (BF), and their portfolio financing (PF) – from the perspective of the manufacturer. Our result shows that whether the BF strategy causes the retailer and manufacturer to set a higher (retail or direct) price than the EPF strategy does closely depends on the early payment discount factor and product heterogeneity level. Interestingly, we find that under some conditions (e.g., when product heterogeneity level is not low or the acceptance level of online channel is not high), the manufacturer prefers to choose the EPF strategy, even when the early payment discount factor of the EPF strategy is higher than the interest rate of the BF strategy. We further find that when the early payment discount factor is smaller than the bank loan interest rate, the manufacturer still prefers the BF strategy if the amount of capital needed by the manufacturer is small. In addition, we show that both competitors can benefit from a higher product heterogeneity level, which is not affected by the manufacturer’s capital status. Our finding provides implications on how the manufacturer chooses a proper channel structure to sell its heterogeneous products, and highlights the effect of the manufacturer’s initial capital and the difference in production costs on the selection of channel structure. • We study the pricing, financing, and channel structure for a capital-constrained dual-channel supply chain. • We explicitly examine the efficacy of the proposed three financing strategies used in reality. • We find that under mild conditions the manufacturer prefers to choose the EPF strategy. • We provide implication on how the manufacturer to choose a proper channel structure to sell its heterogeneous products.