Financing Small and Medium-Size Enterprises via Retail Platforms
41 Pages Posted: 23 Oct 2018
Date Written: September 30, 2018
Problem Definition: This paper studies the multifaceted impact of loan programs initiated by a retail platform to its sellers on these sellers' operational and financing decisions, profits of the sellers and the platform, as well as consumer welfare.
Academic/Practical Relevance: Many small and medium-sized enterprises (SMEs) on retail platforms face capital constraints that limit their ability to meet market demand. Due to lack of sufficient asset and credit history, SMEs also face the challenge of securing loans from traditional banks. Therefore, the financial loan decisions of a retail platform to its SMEs have become an essential part of the platform design.
Methodology: We develop a two-stage game-theoretic model where multiple SMEs who face financial constraints compete on a retail platform, and the platform decides who to offer financial loans and what are the loan credit lines.
Results: We show that the competitive landscape on the platform greatly affects the effectiveness of the platform's loan programs. Offering a generous loan to a monopoly seller on the platform benefits all stakeholders. Offering generous loans to competing sellers, however, can make sellers worse-off in the equilibrium where they are willing to accept the loans -- a prisoner's dilemma. The platform can, by strategically setting the loan limit, reduce the intensity of the prisoner's dilemma for sellers in high or moderate need of funds. Two factors -- the platform's required rate of return and referral fee -- affect the platform's willingness-to-lend and the interaction between the platform and the sellers. We also find that offering asymmetric loans to symmetric competing sellers can benefit both the platform and the sellers as a whole.
Managerial Implications: The research findings provide useful implications for retail platforms on how to offer financial loans to sellers based not only on an individual seller's characteristics but also on the competition in the marketplace. From a government perspective, our research also sheds light on the impact of a platform's loan decisions on consumer welfare and how such decisions should be regulated.
Keywords: Operations-Finance Interface, Platform-Based Financing, Platform Operations, Retail Platform
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