Effects of prepayment policy on equilibrium of the retailer-dominated channel considering manufacturer effort

Abstract

Although upstream manufacturers with small- and medium-sized are gradually willing to invest green efforts for stimulating market demand, they have been encountering the challenge of securing sufficient working capital to develop the green supply chain. Thus, this paper systematically incorporates two types of prepayment policies including risk-free (RF) and risk-taking (RT) into a retailer’s dominated channel. Via deriving operational and financing equilibrium of the green supply chain, a series of interesting findings can be offered. Specifically, (1) this paper identifies a threshold value regarding the manufacturer’s own capital, and proposes two scenarios for assisting the retailer to decide whether offers the manufacturer prepayment policy. (2) The effectiveness of RF for the capital-constrained manufacturer depends on how well its green effort can be implemented. That is, provided that the quality effect is large enough, the manufacturer can get more upfront capital from the retailer, which may entirely cover its total production and green effort costs. (3) Under RT, if the manufacturer’s capital is relatively lower, RT enables the manufacturer to obtain sufficient capital and the retailer is willing to share partial of the manufacturer’s default risk. Otherwise, RT may not be the best prepayment policy for the retailer.