Wednesday, 07 February 2024, 15:00-16:15
Presenter: Koussis Nicos, Frederick University
Trade credit holds a prominent role in fostering economic relationships between buyer and supplier firms. This paper introduces a novel real options framework to examine trade credit maturity’s impact on supply chain production quantities and coordination. We explore trade credit in a multiperiod setting, where both suppliers and buyers make decisions involving uncertain market demand. Our analysis uncovers several key insights. First, we find that the optimal trade credit duration is determined by a trade-off between encouraging larger orders from buyers and the impact of delayed payments on supplier revenues. Additionally, we demonstrate that various model parameters, such as supplier prices, volatility of demand, and market power of buyer firms, influence trade credit value and duration. Our findings align with empirical evidence, emphasizing the importance of credit quality, demand volatility, and buyer market power in trade credit relationships. Furthermore, we investigate the effects of coordination in supply chain decisions and the “make or buy” choice, illustrating that trade credit can act as a coordination mechanism to enhance supply chain efficiency. Our research also highlights the role of trade credit in accelerating buyers’ exercise of capacity expansion options. Overall, our work offers practical guidance for both buyers and suppliers operating in non-coordinated networks or contemplating vertical integration and suggests potential policy implications for regulators regarding trade credit duration.
