OPTIMAL CREDIT PERIODS UNDER TWO-LEVEL TRADE CREDIT

Abstract

In a two-echelon single-supplier and single-retailer supply chain with permissible delay in payment, we investigate the two-level trade credit policy in which the supplier offers the retailer with limited capital a credit period and in turn the retailer also provides a credit period to customers. The demand rate is sensitive to both retail price and the customers credit period. By using the backward induction method, we analytically derive the unique equilibrium of both credit periods in the Stackelberg game to determine the retailers pricing strategy. We find that the optimal retail price is not always decreasing in the credit period offered by the supplier to the retailer. In addition, we characterize the conditions under which the retailer is willing to voluntarily provide customers a credit period. Numerical examples and sensitivity analysis of key parameters are presented to illustrate the theoretical results and managerial insights.