Abstract
Motivated by the practices that many small and middle-sized enterprises (SME) retailers have financial constraints due to their limited budget and financing access, this paper studies the manufacturer’s financial strategy (i.e., trade credit versus vertical merger with a capital-constrained retailer) in a supply chain with two financial asymmetric retailers. We first compare the equilibrium profits under different financing modes and find that if manufacturer’s capital cost under trade credit or administrative cost under vertical merger is below a certain threshold, the manufacturer should finance instead of deselect the capital-constrained retailer even though the competition is intensified. Furthermore, manufacturer can choose a financing strategy based on the tradeoff between financing value and cost from trade credit or vertical merger. Under trade credit, the increased horizontal competition intensity is against the capital-constrained retailer while with vertical merger the competition intensity is harmful to the capital-abundant retailer. In addition, through investigating the impact of different financial modes on the equilibrium profits of the supply chain players, we find that whether trade credit can outperform vertical merger for both the manufacturer and the capital-constrained retailer depends on horizontal competition intensity, profit-sharing proportion and administrative cost of vertical merger. Moreover, the capital-abundant retailer will get the lowest profit when other participators act like an alliance. Our study provides a roadmap for the manufacturer to make a financing policy for capital-constrained retailer who competes with a funded retailer.
Highlights
In order to increase the market share of product, manufacturers usually sell their products through multiple retailers and/or use multiple distribution channels to reach more consumers
This study has three main research questions: (1) Should the manufacturer deselect or assist the capital-constrained retailer under the competitive retail market environment? (2) Which kind of financing service will the manufacturer offer to the capital-constrained retailer? (3) How does the horizontal competition between retailers influence each player’s equilibrium operational decisions and the financing strategy? To answer these questions, we formulate a two-echelon supply chain framework, which consists of a manufacturer and two asymmetric competing retailers basing on the Cournot mode, wherein one retailer is financial constrained, and the other one is fund-abundant
Among the few papers examining trade credits under retailers’ competition, Yang et al [49] developed a supply chain with a supplier and two capital-constrained retailers, and both retailers were able to receive the trade credits from the manufacturer, external bank financing, or equity financing. They discussed each player’s operational strategy based on how many retailers are permitted to be financed through trade credit, and showed that when competition becomes increasingly fierce, the manufacturer will merge with one retailer, and the deselected retailer may utilize bank combined with equity financing channel to return the supply chain
Summary
In order to increase the market share of product, manufacturers usually sell their products through multiple retailers and/or use multiple distribution channels to reach more consumers. SME retailers often have limited budget and are hard to access the external financing such as loans from the banks [9] Under this circumstance, the manufacturer can just deselect the capital-constrained retailer to narrow the distribution channel or provide the financial assistant to the SMEs, who are in the competing sales market. We study the impact of competition on the vertical merger strategy in the supply chain with one manufacturer and two financial asymmetric retailers. Given the background of the asymmetric competing financial retailers, our study aims to examine the financing policies (trade credit versus vertical merger) of the manufacturer. (2) Which kind of financing service (trade credit versus vertical merger) will the manufacturer offer to the capital-constrained retailer?
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