Pricing strategies for dual‐channel supply chains under a trade credit policy

• Author: Liguo Ren,Haodong Chang,Ziping Wang,Juanjuan Qin,Liangjie Xia
• DOI: http://doi.org/10.1111/itor.12634
• Date: 01 September 2020
• Published date: 01 September 2020

Intl. Trans. in Op. Res. 27 (2020) 2469–2508

DOI: 10.1111/itor.12634

INTERNATIONAL

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IN OPERATIONAL

RESEARCH

Pricing strategies for dual-channel supply chains under a trade

credit policy

Juanjuan Qina, Liguo Rena, Liangjie Xiaa,∗, Ziping Wangband Haodong Changc

aSchool of Business, Tianjin University of Finance and Economics, Tianjin 300222, China

bSchool of Business and Management, MorganState University, Baltimore, MD 21251, USA

cCollege of Business, Purdue UniversityNorthwest, Hammond, IN 46323, USA

E-mail: qjj@tjufe.edu.cn [Qin]; 1281476575@qq.com [Ren]; xialiangjie@tjufe.edu.cn [Xia];

ziping.wang@morgan.edu [Wang]; chang322@pne.edu [Chang]

Received 17 May2018; received in revised form 21 November 2018; accepted 21 January 2019

Abstract

This paper discusses the impact of a trade credit policy on alleviating conflicts arising on a dual-channel

supply chain that includes one manufacturer and one value-added retailer. We use the Stackelberg game

to model the problem and characterize optimal pricing strategies for each supply chain partner, examining

different circumstances in terms of retail price and trade credit contracts. When a consistent price strategy

is applied in the dual channels under conditions of an exogenous credit period, trade credit can help both

partners to achieve win-win situations in the following circumstances: (1) when the retail channel’s market

share is small and the retailer’s interest rate is high; or (2) when the retail channel’s market share is large and

the retailer’sinterest rate is lower than the manufacturer’s. The study also concludes thatwhen an inconsistent

price strategy is applied, a trade credit contract can alleviate channel conflicts when the retailer’s interest

rate is higher than the manufacturer’s. Otherwise, the partners may terminate cooperation. However, when

the manufacturer has the power to determine and set the credit period, trade credit cannot alleviate channel

conflicts under consistent price and inconsistent price scenarios.

Keywords:pricing; supply chain management; practice of operations research (OR); gaming

1. Introduction

More and more firms, such as Nike, Apple, and Samsung, are opening direct channels for selling

products to end customers. These new channels are in addition to the traditional retail channels

(Tsay and Agrawal, 2004). The surge of information technology is playing an important role in

the development of the direct channel business model. The direct channel is different from the

retail channel in a number of ways. The direct channel helps the manufacturer reduce costs, better

understands their customers, and increases revenue. In the retail channel, the retailer works as a

∗Corresponding author.

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2019 The Authors.

International Transactionsin Operational Research C

2019 International Federation ofOperational Research Societies

Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main St, Malden, MA02148,

USA.

2470 J. Qin et al. / Intl. Trans. in Op. Res.27 (2020) 2469–2508

middleman to gather market demand information and provide some customer support. For the

reasons above, many firms, including Nike, Apple, and Samsung, prefer to use a dual-channel

strategy (Cao et al., 2013). However, the disadvantage of this strategy is that the manufacturer is

now in direct competition with its channel partners. Thus, channel conflict is the main deterrent to

a manufacturer’s decision to adopt a dual-channel model (Mukhopadhyay et al., 2008). Channel

conflict can be reduced through channel coordination, yielding moreprofit for the channel partners

(Cachon, 2003; Cai, 2010). Thus, if a contract can improve the partners’ profits in a dual-channel

supply chain, we define this contract as being able to alleviate channel conflicts.

A trade credit policy is widely used in a dual-channel supply chain, to alleviate channel conflicts

in specific scenarios. A trade credit is a credit that a seller extends to its buyers, allowing delayed

payment for the purchased products (Petersen and Rajan, 1997). Trade credits usually generate

interest revenuefor the buyer, while the seller bears interest costs. Forexample, many manufacturers

of electronic products, such as Samsung and Huawei, sell their products through dual-channel

supply chains. The manufacturers offer a delayed payment policy to the retailers in their retail

channels, to alleviate the channel conflicts. This type of delay creates a capital pool, providing the

retailer significant gains. The gains from this capital pool can be viewed as the incentive for the

retailer’s investment behavior. For example, for each day the payment term is extended, Jd.com

receives more than 160 million yuan in cash flow.1

However, in other scenarios, a trade credit policy may cause manufacturers and retailers to

terminate cooperation in the dual-channel supply chain. Dual channels are associated with long

credit payment terms. As such, some manufacturers suffer cash-flow risks and must terminate

cooperation with the retailers,relying only on their direct channels (Zhao et al., 2015). For example,

some apparel suppliers, such as Jason Wood and Ochirly, have stopped cooperating with Jd.com,

to avoid losses arising from the long credit terms for the delayed payment.2

Thus, a trade creditsignificantly impacts the decisions and levels of cooperation on a dual-channel

supply chain. This study addresses the following research questions: (1) How does a trade credit

affect the pricing strategies of a dual-channel supply chain? (2) Do firms in a dual-channel supply

chain benefit from trade credits? (3) How do the interest rates, market share, and cross price elasticity

affect the decisions and profits made by those in the dual-channel supply chain?

To answer these questions, we first develop an analytical framework to model the dual-channel

supply chain with a trade credit contract. We assume the manufacturer grants a fixed credit term

to the retailer. More specifically, manufacturers usually offer a credit period of 30 days to the home

appliance retailer Gome, and 60 days to the electronic business retailer Jd.com.3We then derive the

optimal decisions of the partners in the supply chain under the trade credit contract considering the

consistent price and inconsistent price strategies. Second, we characterize the optimal solutions in

the supply chain without a trade credit. Third, we compare the solutions in the dual-channel supply

chain with and without the trade credit. Finally, we extend the model, by considering that credit

terms are decided by the manufacturer under consistent price and inconsistent price scenarios in

the dual-channel supply chain.

1http://net.chinabyte.com/199/12681199.shtml(accessed July 25, 2018).

2http://mt.sohu.com/20160623/n455862334.shtml (accessed July 25, 2018).

3http://tech.163.com/api/15/0611/10/ARQSS2U6000915BF.html (accessed July25, 2018).

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2019 The Authors.

International Transactionsin Operational Research C

2019 International Federation ofOperational Research Societies

J. Qin et al. / Intl. Trans. in Op. Res.27 (2020) 2469–2508 2471

Our work contributes to existing literature in three main ways. First, this is the first study to

theoretically study the impact of the trade credit contract on the dual-channel supply chain, and

it generates several interesting results and insights. Second, this work addresses pricing strategies

under the trade credit contract, complementing existing literature by focusing on inventory policies

under the trade credit contract. Third, our model reveals whether trade credit can improve partner

profitability in a dual-channel supply chain, and explores the impact of partner interest rates, retail

channel market share, and cross-price elasticity. This approach contrasts with the scenario of a

single-channel supply chain, in which past studies have generally concluded that the trade credit

benefits the partners (e.g., Luo and Zhang, 2012; Gao et al., 2014).

The rest of this paper is organized as follows. Section 2 presents the literature review. Section 3

presents the model setup. Section 4 discusses the supply-chain model with/without a trade credit

contract under a consistent pricing strategy. Section 5 analysesthe supply-chain model with/without

a trade credit under an inconsistent pricing strategy. Section 6 extends the models by considering

endogenous credit period decisions. In Section 7, we present our conclusions and managerial

implications.

2. Literat ure review

This section presents a literature review to analyze the dual-channel supply chain and trade credit

contract.

2.1. Dual-channel supply chain

In this section, we mainly focus on the pricing strategiesand channel coordination in a dual-channel

supply chain.

In their research of pricing strategies in a dual-channel supply chain, Yao and Liu (2005) analyze

the pricing strategies using Bertrand and Stackelberg game structures in a dual-channel supply

chain. Dumrongsiri et al. (2008) study a dual channel’s price and service quantity decisions. The

manufacturer decides the direct channel prices, and the retailer decides both the price and order

quantity. Dan et al. (2012) examine the optimal retail services and price decisions in a centralized

and a decentralized dual-channel supply chain, using the two-stage optimization technique and

Stackelberg game. Huang et al. (2012) analyze the pricing and production decisions in dual-channel

supply chains with demand disruptions. Chen (2015) evaluates the influence of price schemes and

cooperative advertising mechanisms on dual-channel supply chain competition. Panda et al. (2015)

discuss pricing and replenishment policies in a dual-channel supply chain under conditions of

continuous unit cost decreases. Cattani et al. (2006) and Li et al. (2016) discuss the consistent

pricing policies of a dual-channel supply chain. Liu et al. (2016) analyze the pricing policies of a

dual-channel supply chain with asymmetric risk aversion information. Zhao et al. (2017) analyze

pricing strategies for complementary products in the dual-channel supply chain.

Researching the coordination of a dual-channel supply chain, Cai et al. (2009) discuss how a

price discount contract can improve a dual-channel supply chain’s performance. Chen et al. (2012)

analyze how a two-part tariff and a profit-sharing agreement can be used to coordinate a dual-

channel supply chain and enable both the manufacturer and retailer to have a win-win. Cao (2014)

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2019 The Authors.

International Transactionsin Operational Research C

2019 International Federation of OperationalResearch Societies