Retailer-Direct Financing Contracts Under Consignment

Diwakar Gupta () and Yibin Chen ()
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Diwakar Gupta: McCombs School of Business, The University of Texas at Austin, Austin, Texas 78712
Yibin Chen: Huawei Device (Dongguan) Co. Ltd., Longgang District, Shenzhen, China

Manufacturing & Service Operations Management, 2020, vol. 22, issue 3, 528-544

Abstract: Problem definition : Many small businesses (suppliers) use web platforms (retailers) to sell their products on a consignment basis. Suppliers are often financially constrained, which affects their profits. Academic/practical relevance : We derive the equilibrium terms of the loan that a retailer will offer to a supplier in a consignment selling environment and their implications for supply chain efficiency. Our model is inspired by the lending program initiated by a major web platform owner. Methodology : We formulate and solve a Stackelberg game. The retailer sets loan terms that may include a debt seniority requirement. The supplier may either accept the retailer’s offer or borrow only from the bank or rely solely on its own capital. A competitively priced bank loan is the supplier’s default option. Results : There exist parameter values for which the on-equilibrium loan terms include retailer debt seniority as well as parameter values that do not. In the latter case, the supplier makes the bank the senior lender. The retailer’s debt seniority choice depends on the supplier’s working capital. When the retailer chooses to be the senior lender, its loan terms may induce the supplier to produce more than the first-best quantity. Managerial implications : Direct financing under equilibrium loan terms weakly improves the expected profits of both the retailer and the supplier. However, it may induce the supplier to produce less than or equal to or greater than the first-best production quantity. Loan limits serve to reduce overproduction.

Keywords: retailer-direct financing; bank financing; debt seniority (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (24)

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