Strategic dual-channel pricing games with e-retailer finance

Abstract

Small and medium-sized enterprises (SMEs) often face obstacles in reaching consumers and obtaining sufficient capital for their production and operations processes. Owning channel advantages and rich transaction data regarding suppliers’ sales, inventory, and credits, e-commerce platforms (henceforth, e-retailers) can offer online distribution channels and online financing service for SMEs to facilitate their distribution and alleviate their capital constraints. This study analyzes the pricing competition in a dual-channel supply chain consisting of one capital-constrained supplier and one e-retailer providing finance. The supplier can sell her products either through the e-retailer using the online channel or through her direct offline channel. The e-retailer offers finance to the supplier if she is capital-constrained. We examine the equilibrium price and the associated optimal quantity and profits in dual channels when supplier may face capital constraint and compete with e-retailer horizontally or vertically. We find that e-retailer finance is a value-added service for e-retailer and that the increased profits generated from financing offerings can offset the lowered revenue in the online distribution channel. E-retailer finance can increase market share, which also benefits the supplier. Participating in the vertical competition through announcing pricing decisions earlier than does the supplier can help the e-retailer seize the first-mover advantage. Further, we present the value of e-retailer finance and examine the impact of various financing, operational, and consumer-related factors on pricing and channel structure. We also provide guidelines for e-retailers and financing-constrained suppliers to utilize e-retailer finance to optimize their dual-channel structure and to make optimal pricing decisions.