Selling to a financially constrained E-commerce retailer with bankruptcy cost and tax

Although it is well-known that a firm’s decisions are affected by its financial constraints and tax rate, few studies have investigated a financially constrained e-commerce supply chain when both bankruptcy cost and tax are considered. This paper fills this gap in the literature by analysing an e-commerce supply chain with a financially constrained e-commerce retailer (e-tailer) who faces uncertain demand in the presence of bankruptcy cost and corporate taxes. In this scenario, the e-tailer may need to secure short-term loans from a bank to place orders. With a Stackelberg game setting, we characterize the equilibrium interest rate, order quantity, and wholesale price. For both exogenous and endogenous wholesale prices, we show that the e-tailer’s optimal order quantity decreases in the tax rate and increases in the bank’s recovery rate (after e-tailer bankruptcy). However, the effect of internal capital on the e-tailer’s order quantity and profit depends on both the tax and recovery rates. Specifically, when the tax rate or recovery rate is low, an e-tailer with more internal capital would order more and may earn a higher profit; this is not always the case when the tax rate or recovery rate is high. For the endogenous wholesale price case, we demonstrate that the e-tailer’s order quantity and the upstream manufacturer’s profit are both greater than those in the traditional newsvendor setting (with taxes), provided the tax rate is relatively high.