A Stackelberg game-theoretic retailer-manufacturer credit period ratio model in a supply channel

Abstract

It is a known fact that a number of market factors determine the provision of trade credit to a financially constrained channel member. It is only recently that credit function was developed to incorporate some of these factors. This paper considers a modification of the credit function in which the retailer-manufacturer credit period ratio determines the amount of credit the manufacturer can give to the retailer. This study considers a Stackelberg game in which the manufacturer who is the channel leader provides trade credit to the retailer through his credit period while the retailer engages in product promotion to sell the product. The work uses backward induction to determine a closed-form solution of the promotion effort, the credit period and the payoffs. The result shows that the promotion effort increases with the manufacturer’s credit period, but reduces with that of the retailer. It also shows that while both players payoffs increase with the manufacturer’s credit period, the manufacturer’s performance is better-off. On the other hand, while the retailer’s payoff reduces with his credit period, the manufacturer’s payoff increases continuously. Thus, it is rational for the retailer to opt for the optimal credit period instead of over elongating the credit period.