The Effect of Bank Financing under Supply Chain-to-Chain Competition

Abstract

We consider two supply chains, each consisting of one supplier and one retailer. The two retailers are involved in Cournot competition and purchase one single product only from the supplier in the same supply chain. The two suppliers are heterogenous in the production cost. In addition, both retailers are in short of capital, hence both of them need to raise bank loans. All players are risk neutral and their objectives are to maximize their own profit. Based on these features, we establish an analytical model and characterize each player’s optimal decision. Compared to the benchmark model when both retailers have sufficient capital, we find that, in optimal, each supplier provides a lower wholesale price to its own retailer. Moreover, when one of the supplier’s cost is small enough, the corresponding supply chain’s competitive advantage is amplified by the financial cost (i.e., loan interest), generating a larger selling quantity to the market. Therefore, the supply chain achieves a higher profit than the benchmark case, while the other supply chain is worse off. However, if the difference of the two suppliers’ costs is not that significant, all players in the two supply chains would be worse off. Moreover, the numerical experiment further shows that when each supplier’s cost is low enough, both retailers can be better off even if they are capital-constrained. Our results provide useful insights into the supply chain competition when retailers use bank loans to finance their operations.