Platform Financing vs. Trade Credit for Lending to Third-Party Sellers

We study platform financing in comparison with trade credit for lending to third-party sellers, considering scenarios where default risk is driven by external factors (exogenous) or influenced by the parties’ decisions (endogenous). Our findings indicate that under exogenous default risk, although platform financing exposes the platform to the seller’s default risk, it can enhance the seller’s sales by providing low-rate finance and reducing the wholesale price because the supplier remains isolated from default risk. Platform financing emerges in equilibrium, benefiting all parties, particularly in businesses facing significant default risk, high product costs, operating in small markets, or having a high commission rate. In cases of endogenous default risk, platform financing can mitigate the seller’s opportunistic behavior, either preventing or reducing default risk, and the effects of product costs and market uncertainty may become nonmonotonic. In certain scenarios, platform financing arises in equilibrium when the product cost is intermediate or sufficiently high but not in between and when market uncertainty is moderate but not low or high. We also explore the impacts of the seller’s initial capital and credit limits, providing valuable managerial insights.