A Three-Level Game-Theoretic Trade Credit Model in a Supply Channel

Abstract

Two-party channel setting has been a choice study-setting for trade credit. This work considers a three-member channel setting using Stackelberg game theory. The study considers the manufacturer as the channel leader, with the distributor as the first follower, and the retailer as the last follower. The manufacturer gives credit goods to the distributor, who similarly gives credit goods to the retailer. The retailer engages in the promotion of the product. Using a promotion effort, price margins and credit periods dependent credit functions, the work examines three game-theoretic models on the manufacturer, the distributor and the retailer’s payoffs. The work uses backward induction to determine the promotion effort, the credit period and the payoffs. It observes that the margins are motivational enough to drive product promotion which reduces with credit period so that in the long-run the promotion effort stabilizes. The work further observes that the distributor’s involvement is very crucial to the payoffs.