Selling Strategy Selection Considering Both the Way of Payment and Inventory Limitation

Abstract

In view of the facts that firms can sell their products on either cash or credit, and they may either meet all buyers' demand or only parts of that by setting an inventory limitation, four selling strategies are investigated in this paper: (i) cash sale without inventory limitation, (ii) cash sale with inventory limitation, (iii) credit sale without inventory limitation, and (iv) credit sale with inventory limitation. By comparing these four strategies, a number of interesting observations can be drawn. First, as to the election of the way of payment, it reveals that credit sale always dominates cash sale as long as the inventory level settings are the same. In particular, and contrary to our intuition, it shows that under the case of credit sale with inventory limitation, the firm may sometimes choose not to serve the low-quality buyers even though it's profitable, and choose to serve them under some other circumstances although it would incur a loss, which are mainly due to the incentive effects by doing so. Second, with regard to the selection of the setting of the inventory level, it demonstrates that if the products are sold on cash, not setting inventory limitation will always bring more profits for the firm than setting one; whereas if the products are sold on credit, instead, setting inventory limitation may outperform not setting one under certain conditions, depending critically on the relationship between the expected profit from selling to the low-quality buyers and the salvage value of the unsold products. Third, when taking both the way of payment and inventory level setting into consideration, it turns out that cash sale with inventory limitation should be used only as a last resort. Nevertheless, the relationship between cash sale without inventory limitation and credit sale with inventory limitation is uncertain, mainly because the inventory limitation and the way of payment are inextricably linked in the presence of moral hazard of the sales agent. In the end, the other two types of compensation contracts --- backed-receivables and reward-penalty pooling contracts --- are also examined. And we find that the optimal selling strategy remains unchanged, which verifies the robustness of the insights.