Trade Credit Financing for Two Competitive Retailers in a Capital-Constrained Supply Chain

Abstract

This study examines trade credit strategy in a supply chain framework including one manufacturer and two competitive retailers under a Cournot game setting. We consider three supply chain models depending on how many retailers have capital constraints: (i) Model NN (i.e., none of the retailers has capital constraints); (ii) model AN (i.e., a single retailer has capital constraint); and (iii) model AA (i.e., dual retailers have capital constraints). We analyze equilibrium strategies of supply chain under three models, and show that the manufacturer sets a higher price for a capital-constrained retailer than that for a fund-abundant retailer. Notably, the fund-abundant retailer’s wholesale price is not dependent on its rival’s capital status. Certain numerical experiments have been performed to show the impact of retailer’s competition, market disturbance, and production cost on trade credit financing strategy. Findings reveal that by increasing the horizontal competition intensity, the capital-constrained retailer benefits more from trade credit. With a higher market disturbance or a higher production cost, the manufacturer is more willing to offer trade credit to capital-constrained retailers.