Trade Credit in an Overconfident Supply Chain

Abstract

We propose a price-only trade credit model in an overconfident supply chain with a price-setting newsvendor. Stackelberg equilibrium in different scenarios are derived, respectively. The retailer’s pricing power prevents the manufacturer from squeezing all profit. When the manufacturer knows the retailer holds a different overconfidence parameter, the optimal wholesale price decreases in the manufacturer’s overconfidence, while when the manufacturer believes that the retailer holds the same overconfidence parameter as it, this monotonicity may not be valid. Bilateral overconfidence may partially coordinate the supply chain. Retailer’s strategic default induces a higher wholesale price, while its impacts on the equilibrium retail price and order quantity depend on the bankruptcy cost coefficient. We present the impacts of the manufacturer’s capital constraint and retailer’s risk-aversion.