Coordination of Supply Chain with Trade Credit under Bilateral Information Asymmetry

Abstract This article explores the function of trade credit in coordinating supply chain under both symmetric and bilateral asymmetric information. The financing function and positive externality of trade credit are also illustrated in this article. In a supply chain composed of a manufacturer and a budget constraint retailer, the manufacturer can use trade credit to finance the retailer and thus increases the retailer's order size up to the supply chain's optimal lot size. The benefit of coordination is allocated randomly among the parties by setting the length of the trade credit. When the retailer sells multiple products, trade credit's positive externality, that is one supplier's trade credit can increase the other supplier's profit, is demonstrated. When both the retailer and the manufacturer have private information, we use double auction model to derive the length of the credit. Numerical example is conducted to demonstrate the theoretical results.