A Mathematical Model of Optimal Manufacturer-Retailer Trade Credit Policy with End-User Credit Support

Abstract

The formulation and incorporation of credit function into trade credit models is a much recent development. In addition extension of this innovation to the end-user has not been achieved. This work models trade credit interaction extension from a manufacturer to a consumer through the retailer. It considers a Stackelberg game-theoretic model setting in which the manufacturer provides channel trade credit through the retailer to the end-user, while the retailer engages in promotion of the product. The paper uses backward induction to obtain the Stackelberg equilibrium for the promotion effort, the retailer’s credit period and the manufacturer’s credit period. It also obtains the long-run Stackelberg equilibria for the decision variables. The paper shows that the retailer is more liberal with allowable credit period than the manufacturer. In general, the players are credit period-liberal with retail margin, and ungenerous with credit period with manufacturer’s margin. It further shows that the manufacturer’s credit period increases more rapidly than the retailer’s credit period with retailer’s margin. On the other hand the manufacturer’s credit period decreases more rapidly than the retailer’s credit period with the manufacturer’s margin.