The supplier's optimal guarantee policy in newsvendor finance

Abstract

AbstractThe retailer is a capital‐constrained newsvendor and can borrow money from the bank if necessary. To help the retailer get a bank loan at a lower interest rate, the supplier provides guarantee for the retailer's loan up to a prespecified amount. In a Stackelberg game, the supplier decides the wholesale price and the guarantee amount as a leader, and then the retailer determines the order quantity and the amount of the loan as a follower. The supplier is risk‐neutral while the retailer's risk preference is reflected by a spectral risk measure (risk‐neutral, risk‐averse, or risk‐seeking). For a given wholesale price and guarantee amount, the retailer's objective function is quasi‐concave in the order quantity. The optimal solutions for the supplier and the retailer are derived. The supplier's expected profit with optimized wholesale price increases with the guarantee amount, and thus the supplier's optimal policy is to provide a full guarantee for the retailer's loan. When the supplier can limit his guarantee responsibility by a proportion of the outstanding loan obligation, the supplier's optimal policy is also to provide a full guarantee. Even if the retailer incurs bankruptcy costs in the event of repayment default, the supplier's optimal guarantee policy remains the same in these two different forms of limited guarantee. However, when the wholesale price is exogenous, that is, not a decision variable, the full guarantee is not necessarily optimal for supplier.