Modelling a manufacturer-retailers trade credit supply chain using game theory

Abstract

Game-theoretic trade credit models are quite scarce, especially in relation to product promotion. This work examined a trade credit supply chain involving a manufacturer and two retailers in a decentralised supply chain in which the retailers engage in product promotion while the manufacturer financed them through credit provision. It considered a supply chain structure in which the manufacturer provides trade credit to the retailers and a situation in which he does not provide trade credit. It used Stackelberg game theory to determine the optimal promotion efforts, the credit periods and the players’ payoffs, and showed that while the manufacturer is better-off with the retailers’ efforts, the retailers need to consciously determine appropriate optimal effort to avoid getting short-changed. It also showed that while credit period reduces with the manufacturer’s margin, it increases with a retailer’s margin. It further showed that while the retailers’ payoffs reduce continuously with credit period, the manufacturer’s payoff is fixed in the long-run irrespective of the credit period provided by the manufacturer to the retailers. By comparison the players as well as the channel perform better with the adoption of trade credit, however a retailer must avoid placing he price margin at equality with that of the manufacturer if he hopes to enjoy long credit period.