Trade credit provision under uniform price regulation

Abstract

To encourage product market competition, uniform price regulation is imposed to forbid suppliers from price discrimination. This paper investigates the impact of price regulation on a supplier’s trade credit decision in a supply chain with two heterogeneous retailers. In the baseline model without price regulation, we show that it is optimal for the supplier to provide net term trade credit to both retailers if their working capital is at a low level. Under price regulation, the net term remains optimal in trade credit provision to the rich retailer. However, a two-part term emerges to be optimal in the supplier’s trade credit provision to the poor retailer when it is highly capital-constrained. Interestingly, in the presence of a capital disparity, we find that the price discount in two-part term trade credit is independent of the rich retailer’s capital level, justifying the stability and uniformity of two-part terms in practice. We also incorporate retailer competition into our analysis and further validate the optimality of two-part terms under price regulation. In numerical experiments, we analyze the policy implications of price regulation and observe that uniform price regulation can result in a higher wholesale price and impede trade credit provision, hurting both small businesses and consumers.