Information advantage and payment disadvantage when selling goods through a powerful retailer

Abstract

In practice, selling goods through a powerful retailer such as Wal-Mart enables the supplier to access the retailer’s ERP for accurate demand information (e.g., Wal-Mart’s Retail Link). However, in the recent years, we observe the suppliers are suffering from longer and longer average account period when they contract with powerful retailers. Therefore, whether partnering with a powerful retailer at the cost of a longer account period becomes the supplier’s strategic decision. In this paper, we formulate the supplier’s tradeoffs among the information advantage, payment disadvantage, and channel competition when it makes retailing decisions. We study the supplier’s two representative strategies: (1) relying on a small retailer that does not accumulate much information but can settle accounts immediately (referred to as Real-time Payment Retailing) or (2) relying on a powerful retailer that shares accurate demand information but incurs deferred payment (referred to as Deferred Payment Retailing). We built game-theoretical models and found that, interestingly, the supplier will prefer Deferred Payment Retailing when the supplier’s cash opportunity cost is high. We identify three interactive forces, namely, the pricing power effect, the demand size effect, and the information value, to interpret the rationality of the supplier’s preferences over Real-time and Deferred Payment Retailing strategies.