Trade credit or vertical merger strategy for financial constrained retailer in a supply chain with asymmetric competing retailers

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.