Strategic credit sales to express retail under asymmetric default risk and stochastic market demand

Abstract

Express retail, a new mode for logistics service providers (LSPs) entering the retail market, satisfies customers’ demand for both purchases and logistics. The supplier offers credit sales to promote express retail ordering, but this inevitably induces credit default risk, especially given an LSP with private credit information and stochastic market demand. To solve this problem, we model a supply chain with an LSP that has either a high or low credit status, which is its private information. In the presence of both stochastic market demand and asymmetric credit information, we propose three credit sales strategies: screening, censoring and factoring. The results indicate that the high-credit status LSP is offered shorter credit periods under all three strategies, while that of the low-credit LSP is unchanged in the screening strategy but lengthened under the censoring and factoring strategies. Moreover, we find that it is more beneficial for the supplier to choose the screening strategy when credit conditions in the market are not particularly good or when the sales incentive effect is relatively small. Otherwise, the supplier has more latitude to exploit all three strategies based on the asymmetric default risk effect. Finally, we show that although a lower expectation or a smaller fluctuation in market demand will induce the supplier to adopt the screening strategy, the growing asymmetric default risk effect becomes crucial in shifting the supplier’s tactic preference regarding credit sales to the other two strategies when either two market factors increase.