Optimal two-level trade credit with credit-dependent demand in a newsvendor model

A two-level trade-credit mode, in which both supplier and retailer provide trade credit to their buyers, is prevalent in several types of markets. This paper investigates the optimal trade credits provided by the supplier and retailer, and the optimal order quantity, assuming credit-dependent demand in a newsvendor model. The strategic interaction between the supplier and retailer is modeled as a Stackelberg game with the supplier as the leader. We provide conditions under which the optimal decisions on trade credits and order quantity can be uniquely determined, which enable us to examine the relationship between the optimal trade credits and describe conditions providing them. We also compare the credit contract and price contract in profit, consumer surplus, social welfare, double marginalization, and supply chain coordination, and our analysis shows that the trade-credit contract amounts to an alternative for the price contract. Finally, we use several numerical examples to illustrate the theoretical results and provide managerial insights.