Joint decision for credit terms and order policy with default risk

Abstract

This paper studies how the two players in dynamic game decide trade credit term respectively by considering a default risk component. Relationship of those two credit terms has a great influence on default event, since capability of the retailer making payment is related to this relationship. A bilevel programming model with unit cost minimization objectives to the supplier, who serve as the “leader”, is set up to determine the credit term by incorporating the predictive credit term offered by the retailer and default risk. Unit return maximization to the retailer is used to obtain the optimal credit term offering to consumers and procurement policy. Hence, the decision-making process of those two credit terms is a dynamic game process. Numerical experiments show that the rate of change of demand on the retailer's credit term is the most important factor determining the credit term offered by the supplier.