۱٫ Introduction

۲٫ Literature review

۳٫ Model description

۴٫ Benchmark without capital constraint

۵٫ Financing with bank, third-party platform, or retailer credit

۶٫ The manufacturer’s financing strategy preference

۷٫ Sensitivity analysis

۸٫ Extension

۹٫ Conclusions

Acknowledgements

References

Abstract

The third-party platform channel has been widely used in addition to the traditional retail channel to sell products. In practice, some third-party platforms provide financing services to small businesses that sell products on them. However, few studies addressed the capital constraint problem faced by a manufacturer who sells products through both retailers and thirdparty platforms, especially when considering the third-party platform’s lending service behavior. This research establishes a model where a capital-constrained manufacturer sells products through a retailer and a third-party platform and may pursue a financing strategy by borrowing from the third-party platform (3PF), the retailer (RF), or the bank (BF). We investigate the impact of the third-party platform’s or retailer’s dual role—lending provider and channel participant—on dual-channel operational management and study the manufacturer’s financing strategy choices by comparing profits under different financing strategies. The results of our analysis show that for the manufacturer, the 3PF strategy is always better than the BF strategy. Furthermore, the manufacturer is more likely to prefer the RF strategy to the 3PF strategy as the channel competition increases or as the revenue sharing rate or unit production cost decreases. We also find that the retailer’s retail price increases as the revenue sharing rate increases if there is no capital constraint, but it decreases under the BF and 3PF strategies. This indicates that the manufacturer’s financing behavior has a significant impact on the retailer’s retail price decision. We extend our model by considering random demand and find that these findings continue to hold when the potential demand equals its expected value.

Introduction

With the increasing prevalence of online retailing, many upstream manufacturers are able to engage in direct selling in addition to their existing traditional channel. While paying a fee to a third-party platform to access online customers, they can make decisions regarding key factors, such as retail price, without investing in stores or a website. Indeed, third-party platforms, such as Taobao in China (Bonfils, 2012), Flipkart in India (Tiwari, 2014), and Amazon in the United States (Barr, 2012), have embraced this widely. Moreover, lack of funding for business development can be a challenge that hinders growth. Thus, some third-party platforms provide lending services to manufacturers or suppliers selling products on them. For instance, firms selling goods on Amazon can obtain loans from the company ranging from $1,000 to $750,000 for up to a year, with annual interest rates ranging from 6% to 17% (Dean, 2017). Alibaba, the owner of Taobao.com, provides loans to small foreign and domestic business-to-business (B2B) enterprises operating on Taobao.com (Interfax, 2011). San Diego-based food and beverage maker LonoLife has been selling on Amazon since 2016 in addition to its traditional channel, and it was offered a line of credit about a year later. According to the president of LonoLife Inc., “Customers expect to be able to buy LonoLife on Amazon. The loan from Amazon Lending gave LonoLife the ability to procure bulk raw materials and packaging to build inventory to keep up with incredible customer demand” (Terzo, 2017). The third-party platform’s lending service may affect both the manufacturer’s direct channel and traditional channel operations. As a participant in the manufacturer’s direct channel, the third-party platform’s joint consideration of the lending and operation management increases the complexity in the decision-making process.