Strategic Credit Sales To Express Retail Under Asymmetric Default Risk and Stochastic Market Demand

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Strategic credit sales to express retail under asymmetric default risk

and stochastic market demand ✩
Kai Wang a, Peiqi Ding b,∗, Ruiqing Zhao a
a
College of Management & Economics, Tianjin University, Tianjin 300072, China
b
School of Management, Northwestern Polytechnical University, Xi’an 710129, China
a r t i c l e i n f o a b s t r a c t
Article history: Express retail, a new mode for logistics service providers (LSPs) entering the retail market, satisfies cus-
Received 18 February 2019 tomers’ demand for both purchases and logistics. The supplier offers credit sales to promote express retail
Accepted 20 March 2020
ordering, but this inevitably induces credit default risk, especially given an LSP with private credit infor-
Available online xxx
mation and stochastic market demand. To solve this problem, we model a supply chain with an LSP that
Keywords: has either a high or low credit status, which is its private information. In the presence of both stochastic
Logistics service supply chain market demand and asymmetric credit information, we propose three credit sales strategies: screening,
Express retail censoring and factoring. The results indicate that the high-credit status LSP is offered shorter credit peri-
Credit sales ods under all three strategies, while that of the low-credit LSP is unchanged in the screening strategy but
Asymmetric information lengthened under the censoring and factoring strategies. Moreover, we find that it is more beneficial for
Stochastic demand the supplier to choose the screening strategy when credit conditions in the market are not particularly
good or when the sales incentive effect is relatively small. Otherwise, the supplier has more latitude to
exploit all three strategies based on the asymmetric default risk effect. Finally, we show that although
a lower expectation or a smaller fluctuation in market demand will induce the supplier to adopt the
screening strategy, the growing asymmetric default risk effect becomes crucial in shifting the supplier’s
tactic preference regarding credit sales to the other two strategies when either two market factors in-
crease.
© 2020 Elsevier Ltd. All rights reserved.
1. Introduction by express companies in China, representing over 40% of the world

total2
Express retail, made possible by the proliferation of e- Express companies have long served as commodity carriers,
commerce marketplaces and logistics firms, is a new trend and an which can be regarded as a “supporting role” on the retail stage.
opportunity to adopt a new logistics service procurement method. The principal express companies now increasingly seek opportu-
Given the large scale of e-commerce transactions, online shopping nities in the highly competitive retail industry, become commod-
represents the main driver of China’s express industry. In recent ity sellers, and compete for the “leading role”. In 2012, SF Ex-
years, the profitability of online shopping has led to a surge in express, China’s leading logistics company, defined cold chain tech-
press business. Of all online retail sales in China in 2017, 77% (i.e., nology as its core competitiveness, and launched a fresh food e-
5.48 trillion RMB yuan) consisted of physical goods1 , which ben- commerce platform “SF-best” that presents high cold chain techni-
efitted from the advanced logistics services available in China. As cal requirements. Later in 2014, SF Express officially debuted its of-
the e-commerce market has matured, advanced logistics services fline convenience store “Hey Guest” nationwide. Similarly, in 2017,
play a significant role in customers’ purchasing decisions (He et al. YTO Express’s physical supermarket “MUM’S SELECTION” opened
[12]). According to the 2017 China Post Development Report pub- in a large community in Putuo District, Shanghai. The store offers
lished by the State Post Bureau, 40 billion parcels were delivered not only fresh meat and fruits, eggs and other products but also
various kinds of fast food items. Following SF Express and YTO Ex-
press, other logistics service providers (LSPs) such as ZTO Express,
✩
This manuscript was processed by Associate Editor He. YUNDA and BEST Express entered the retail market.
∗
Corresponding author.
E-mail addresses: kaiwang@tju.edu.cn (K. Wang), dingpeiqi@mail.nwpu.edu.cn (P.
Ding), zhao@tju.edu.cn (R. Zhao).
1 2
Report on the online retail market in China-2017. http://www.100ec.cn. http://www.spb.gov.cn/xw/dtxx_15079/201806/t20180604_1581131.html.
https://doi.org/10.1016/j.omega.2020.102253
0305-0483/© 2020 Elsevier Ltd. All rights reserved.
Please cite this article as: K. Wang, P. Ding and R. Zhao, Strategic credit sales to express retail under asymmetric default risk and
stochastic market demand, Omega, https://doi.org/10.1016/j.omega.2020.102253
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2 K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx
To encourage an LSP to order more, suppliers frequently offer risk via the screening or censoring strategy only when the market
credit sales by allowing LSPs to pay for their orders over a cer- credit status is fine. Otherwise, the supplier exclusively prefers the
tain credit period. However, offering the option of delayed pay- screening strategy. Finally, we show that although a lower expec-
ment entails a major negative effect: credit default risk, which is tation or a smaller fluctuation in market demand will inspire the
related to the buyer’s credit status and influences the supplier’s fi- supplier to adopt the screening strategy, with the asymmetric de-
nancial stability (see Hull et al. [15], Galil and Soffer [9] and Wang fault risk effect increasing, the supplier will shift its tactic prefer-
et al. [32]); this is especially problematic when credit levels are ence regarding credit sales to the other two strategies when either
subject to asymmetric information. The LSP’s credit status is of- two market factors increase.
ten the LSP’s private information, which is difficult for the sup- The reminder of this paper is organized as follows. Section 2 re-
plier to assess. In addition, an LSP often faces stochastic demand views the relevant literature. The notations and problem descrip-
since the market demand for commodities is influenced by various tion are presented in Section 3. The models are analyzed in
factors, both predictable and unpredictable. Such stochastic market Section 4. The characteristics of each strategy are explored in
demand affects the LSP’s profit and its ordering plan (Braz et al. Section 5. Section 6 provides several numerical examples to com-
[3]). Therefore, it is difficult for a supplier to offer a credit sales pare each strategy and obtain managerial insights. Section 7 ex-
policy when an LSP with private credit status information faces tends our model. Section 8 offers the main conclusions. The proofs
stochastic market demand. are relegated to the Appendix.
To manage credit default risk under asymmetric credit status
information, the supplier often applies three strategies: screening, 2. Literature review
censoring and factoring. Specifically, the screening strategy allows
the supplier to offer distinct contract terms to distinguish among Our work lies at the intersection of logistics and finance. Specif-
LSPs with different credit statuses, as LSPs engaging in mimicking ically, there are three primary streams of related research: the lo-
cannot realize their specific optimal profits. However, the supplier gistics management literature on express retail, the supply chain
inevitably pays a certain information rent to screen the private in- finance literature on credit sales and delayed payments, and the
formation (see Li et al. [19] and Bolandifar et al. [4]). Under the operations management literature on mechanism design under in-
censoring strategy, the supplier can censor LSP credit status at the formation asymmetry.
beginning of trade. However, the accuracy and cost of its censoring The first stream in the logistics management literature related
are important factors in the supplier’s credit decision (see Terdpao- to our study is the research on express retail, which has attracted
pong and Mihret [31] and Yoshino and Taghizadeh-Hesary [40]). considerable attention worldwide. Cai et al. [5] consider a supply
The factoring strategy allows the supplier to transfer credit default chain in which a producer supplies a fresh product to a distant
risk to the factoring company. However, expensive factoring premi- market through a third-party logistics provider. Xu et al. [35] in-
ums make it less desirable for the supplier to adopt this strategy vestigate a B2B e-commerce logistics problem with intermodal
(see Balog [2] and Do [8]). Therefore, as each of these strategies transportation. Liu et al. [21] consider a logistics service integrator
has its advantages and disadvantages, it is valuable to explore how that has two opportunities to order logistics service capacity from
and when the supplier should choose these strategies in its inter- an LSP before the selling season begins. Ottemoller and Friedrich
actions with LSPs. [27] introduce a model to determine possible impacts of changes
Previous studies on express retail and credit periods are based in supply chain structures on freight transport demand. Hu et al.
on complete information and an economic order quantity (EOQ) [14] investigate the optimal selection strategy of LSPs and the or-
model with fixed market demand (see, e.g., Goyal [11], Teng [29], der allocation strategy under the mass customization of logistics
and Lashgari et al. [18]). However, in practice, the LSP’s credit services. Liu et al. [22] investigate the order allocation of a logistics
information is unknown to the supplier, and market demand is service supply chain that consists of one logistics service integrator
stochastic. Motivated by how the joint effect of asymmetric credit and two LSPs. Liu et al. [23] focus on the service provider by con-
information and stochastic market demand affects the supplier’s sidering the effects of the provider’s threshold participation quan-
trading strategy regarding credit sales, our aim is to answer the tity, VAS and matching ability on pricing decisions. Differing from
following questions: given this joint effect, how should the sup- these studies, the present study focuses on the case when LSPs act
plier design aspects of its credit sales policy, such as the credit not only as logistics services providers but also as retailers in the
period and payment amount, under each strategy? What are the market and specifically how the supplier offers credit sales to LSPs
characteristics of each strategy in setting credit sales policy? How to promote sales. Moreover, instead of investigating a logistics re-
should the supplier choose the proper strategy for dealing with the tail optimization problem under complete information, we explore
LSP? the joint effect of stochastic market demand and asymmetric credit
This paper focuses on express retail management, specifically fi- information on the supplier’s credit sales policy. Furthermore, we
nancing decisions under stochastic market demand and asymmet- examine the extent to which credit strategies prevent the supplier
ric information in credit sales. This study contributes to the exist- from exposure to default loss risk.
ing literature in four ways. First, we consider a two-echelon sup- The second stream of research about supply chain finance con-
ply chain with an LSP under asymmetric credit information and sists of studies on delayed payment in credit sales. Among these
stochastic market demand. To the best of our knowledge, the joint studies, Teng [29] develop credit policies for a retailer that offers
effect of asymmetric information and stochastic market demand on different delayed payment options to its customers with good and
the supplier’s credit sales strategy design, although an important bad credit status. Hu and Liu [13] investigate permissible payment
and common real-world problem, has rarely been explored in the delays and allowable shortages based on an economic production
literature. Second, we explore the distinctions among three strate- quantity model. Teng et al. [30] extend the constant demand in an
gies and which of them is desirable for the supplier. Third, we find economic order quantity (EOQ) model to a linear non-decreasing
that the optimal credit period for an LSP with low credit status is demand function of time. Taleizadeh et al. [28] consider an EOQ
longer than that of a high-credit LSP. Moreover, the optimal credit problem under backordering and partial delayed payment. Chen
period for a low-credit LSP under the screening strategy is longer et al. [6] develop an EOQ model based on a conditionally permis-
than that under the factoring strategy and shorter than that under sible delay linked to order quantity. Wang et al. [32] propose an
the censoring strategy. Additionally, the supplier has the leeway to EOQ model for a seller under the assumption that lengthening the
decide whether to transfer risk via the factoring strategy or take credit period increases not only demand but also default risk. Kou-
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K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx 3
velis and Zhao [25] study contract design and coordination of a terisk on a variable represents the optimal solution of the variable.
supply chain. Wu et al. [33] extend previous models by taking pric- For instance, m∗ is the optimal solution of m.
ing into consideration, exploring deterioration rates linked to expi-
Parameters Description
ration dates, and adding an appropriate non-constant purchasing
cost. Zhao and Huchzermeier [42] examine advance payment dis- f (· ) The probability density function (PDF) of the demand
count and buyer-backed purchase order financing. Our study differs distribution
F (· ) The cumulative distribution function (CDF) of the demand
from the above research in several respects. First, in contrast to the
distribution
assumption of complete information available to both parties, our b Credit sales sensitivity coefficient
model considers asymmetric credit information between the seller m Credit period
and buyer to better capture the practical trading problem. Second, M Initial payment
K Basic order quantity
considering that the seller’s and buyer’s decisions could interact
q Order quantity
with one another in practice, from a principle-agent perspective, β Likelihood that the supplier believes that the LSP’s credit is
our model explores how the buyer’s response affects the seller’s high
decision rather than only focusing on the seller’s optimal decision αs Supplier’s annual compound interest rate
as most EOQ models do. Third, instead of setting fixed market de- αl LSP’s annual compound interest rate
θH Coefficient of the default risk of a high-credit status LSP
mand as most EOQ models do, we assume that demand is stochas-
θL Coefficient of the default risk of a low-credit status LSP
tic because market demand is always changing, which makes it dif- Gi Probability that the LSP will default on the credit payment
ficult to accurately predict in advance. w Wholesale unit price
Another stream of literature is on asymmetric information, c Production unit cost
p Market sales price
which is widely studied in supply chain management. Yang et al.
λ Censoring accuracy
[39] study a manufacturer facing a supplier privileged with private I Censoring cost
information about supply disruptions. Gan et al. [10] finds that the rf Risk-free interest rate
supplier can obtain the retailer’s private demand information by ri Interest rate for each credit type LSP
offering a menu of commitment-penalty contracts to maximize its πsi Supplier’s profit function for LSP in each credit category
πli LSP’s profit function by credit category
expected profit. Kim and Netessine [16] investigate how asymmet-
πs The expected profit of the supplier
ric cost information and procurement contracting strategies inter-
act to influence the supply chain parties’ incentives to collaborate.
Yan and Cao [37] assume that the product return is private infor- 3.2. Problem description
mation of the online retailer and study the value of product re-
turn information to supply chain firms. Lobel and Xiao [24] study We consider a typical supply chain comprising a supplier (the
a situation in which a manufacturer sells to a retailer under a long- leader) and an LSP (the follower). As express companies gradu-
term supply contracts and demand information is the private infor- ally acquire terminal resources (logistics customers), the LSP would
mation of the retailer. Zhang and Zhang [41] studies a two-period take on the retail and transportation roles, as in the cases of
supply chain when the supplier’s cost is stochastic and the retailer MUM’S SELECTION, SF-best and 7FRESH, and sell products to cus-
has private market potential information. Zhuo et al. [43] studies tomers. To improve product sales, the supplier provides trade
the implications of risk considerations for option contracts in a credit to the LSP but inevitably bears credit default risk, especially
two-echelon supply chain and analyzes option contracts when the when the LSP’s credit status is private information. There are three
retailer’s risk aversion threshold is private information. Yang et al. typical strategies for the supplier to reduce default risk: screen-
[38] studies the contract design problem in a reverse recycling sup- ing, censoring, and factoring. Further details are provided on these
ply chain where the recycling cost is private information. The pre- strategies below. The trade process is illustrated in Fig. 1.
vious papers study asymmetric information with respect to cost, Market demand is stochastic and realized after the LSP has or-
demand, reliability, product return, and the risk aversion threshold. dered. Hence, market demand is denoted by a random variable ξ ,
In contrast, we explore asymmetric credit status information and the support of which is [0, +∞ ). The PDF of ξ is f(x ), the CDF is
focus on its impact on the optimal credit sales strategy in a two- F(x), and the complementary CDF is F (x ) = 1 − F (x ). We assume
echelon supply chain. We also investigate the distinctions among that F(x) is differentiable and strictly increasing and that its hazard
three strategies and which of them is desirable for the supplier. rate h(x ) = f(x )/F (x ) is increasing in x. Let H (x ) = xh(x ) denote the
We identify five key factors that determine the dominance of one generalized failure rate. For technical purposes, we assume that the
strategy over the others and explore how the supplier adopts the demand distribution includes a strictly increasing failure rate (IFR),
appropriate credit sales strategy. i.e., H(x) is monotonically increasing in x. This is a widely used as-
sumption in supply chain modeling for the existence and unique-
3. Model setup ness of the optimal solution. Many common distributions such as
the uniform, normal, exponential, and gamma distributions include
3.1. Notation an IFR (see Kouvelis and Zhao [25] and Yan et al. [36]).
The LSP’s order quantity is positively related to credit period
For simplicity, the following notation and variables are used provided by the supplier. Since allowing the LSP to purchase on
throughout this paper to develop the model. In addition, an as- credit represents a short-term interest-free loan to the LSP, which
helps to reduce LSP’s capital constraints, the credit period has a
positive impact on the LSP’s order quantity. We assume that LSP’s
order quantity q(m) is a positive exponential function of the credit
period m offered by the supplier as follows: q(m ) = Kebm , which is
widely used in studies with credit-period-dependent order quan-
tity functions, such as Wang et al. [32], Wu et al. [34], Chen and
Teng [7] and Li et al. [20]. K is the LSP’s basic annual order quan-
tity, and b is the credit sales sensitivity coefficient, b ∈ (0, 1). In
Fig. 1. A supply chain trading with strategy design under asymmetric information other words, the LSP is willing to order more products if the sup-
and stochastic market demand. plier provides a generous credit period m.
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When the supplier offers a longer credit period, it inevitably the three credit strategies affect trade credit payment schemes un-
faces a higher credit default risk. In general, the rate of default risk der asymmetric information and stochastic market demand.
G(m) is assumed to be a function of the credit period m offered by The LSP’s payment scheme consists of an initial cash payment
the supplier; that is, G(m ) = 1 − e−θi m , where θ i , the default risk and a delayed payment. The supplier receives the delayed pay-
coefficient, is a nonnegative constant. This function form for the ment contingent on the LSP’s credit level. Due to the time value
rate of default risk is widely used in the credit default literature of capital, the present value of the amount paid by the LSP is
(see Wang et al. [32], Wu et al. [34], Chen and Teng [7] and Li et Tli = Mi + wq(mi )e−(θi +αl )mi , while that for the supplier is Tsi =
al. [20]). If the credit period m = 0, the rate of default risk G(m) Mi + wq(mi )e−(θi +αs )mi . The difference reflects the fact that the LSP
is zero, which means that all payment is paid in cash and the LSP is smaller and thus has more restricted access to the credit market
has no potential to default. If the credit period m → ∞, then the than does the supplier.
rate of default risk G(m) is 1, which means that the credit line will Based on the trade credit payment, the expected profit of an
become a bad debt for certain. LSP of each credit type can be expressed as follows:
We assume that the LSP is one of two credit status types: a
high-credit LSP, denoted H, and a low-credit LSP, denoted L. The πli = E[ p min{q(mi ), ξ }] − Mi − wq(mi )e−(θi +αl )mi , i ∈ {H, L},
major difference between these two types of LSPs is the level of (1)
default risk. The default risk coefficient of a high-credit LSP θ H where π li denotes the profit of LSP with credit type i, l denotes an
is not higher than that of a low-credit LSP θ L , that is, θ H ≤ θ L . LSP, p is the market price of the product, w is the wholesale price,
Consider the functional form of the default risk level; we have and E[pmin {q(mi ), ξ }] represents the actual expected sales, which
GH (m ) ≤ GL (m ), which means that the default probability for a depend on both realized demand and the available order quantity.
high-credit LSP is lower than that of a low-credit LSP. In addition, Further, the supplier’s profit can be expressed as follows:
the credit status is asymmetric information between the supplier
and LSP. That is, the LSP’s credit status is its private information πsi = Mi + wq(mi )e−(θi +αs )mi − cq(mi ), i ∈ {H, L}, (2)
since the LSP exactly knows its own situation, while the supplier where π si denotes the supplier’s profit when trading with an LSP
can only assess the likelihood that the LSP is one of the two credit with credit type i, and c is the per unit production cost.
types. We assume that β is the probability that the supplier be-
lieves that the LSP is of the high-credit type, and thus, (1 − β ) is 4.1. Case of screening strategy (S)
the probability that the supplier believes that the LSP is of the low-
credit type. Under the screening strategy, the supplier offers the LSP a menu
The supplier is a larger firm and has a higher credit rating than of contracts to maximize its own profits. The contract includes in-
the LSP. Therefore, the supplier’s discount rate is higher than the centive compatibility (IC) constraints to induce the LSP to tell the
LSP’s: αs ≥ αl , which reflects the fact that supplier is often a larger truth when the LSP has private credit score information that is un-
company that has better investment opportunities, a greater ability known to the supplier. The LSP can maximize its profits only by
to manage its production activity, and higher efficiency in manag- choosing a contract that accords with its actual credit status. Let
ing its cash flow; hence, the supplier can obtain a higher return πsS be the supplier’s expected profit. The supplier’s problem, there-
on capital. In contrast, the LSP is often a smaller company with fore, can be formulated as follows:
weaker capital management ability; hence, the LSP may obtain a ⎧ S S
⎪ max πsS = βπsH S
MH , mH + (1 − β )πsLS MLS , mSL
lower return on capital. With the annual compound discount rate ⎪
⎨Mi ,mi
S S
α κ , κ ∈ {s, l}, the present value is e−ακ m , which indicates that if subject to:
S S (3)
⎪
⎩IR-i πliS MiS , miS ≥ 0,S i ∈ {H,L},
the supplier and LSP lend and borrow at time m, the opportunity S
⎪
cost is higher for the supplier than for the LSP. IC-i πli Mi , mi ≥ πli MSj , mSj , i, j ∈ {H, L}, i = j,
The credit payment scheme includes two terms: an initial pay-
ment M that the LSP pays as a down payment and the period m where the superscript S denotes the screening strategy. The indi-
over which the LSP must repay the remainder of its obligation. This vidual rationality (IR-i) constraints mean that the LSP receives at
form of payment, which contains not only a fixed cost (i.e., the ini- least its reservation profit, which is usually exogenous and could
tial payment M) but also a variable cost (i.e., a delayed payment be normalized it to zero without loss of generality. From the reve-
based on order quantity q(m)) committed to be paid at time m, is lation principal (see Myerson [26] for example), the IC-i constraints
called a two-part tariff pricing strategy and is widely used in the ensure that the LSP does not mimic the other credit status and
mechanism design literature (see Yang et al. [39] and Babich et al. chooses the contract that yields the highest profit. Therefore, we
[1]). Hence, there is no need to subtract the initial payment from have the following proposition.
the delayed payment. The sequence of events is as follows. First, Proposition 1. Under the screening strategy, (1) for the high-
since the credit status is the LSP’s private information, the supplier ∗
credit LSP, the optimal credit period mSH is given by equation
chooses a mechanism and offers a trade credit contract (Mi , mi ) to S∗ S∗
the LSP. Second, the LSP chooses whether to sign the contract ac- β bpF (KebmH ) + β (b − θH − αs )we−(θH +αs )mH + (1 − β )(b − θL −
S∗ S∗
cording to its own private credit information. If the LSP signs the αl )we−(θL +αl )mH − (b − θH − αl )we−(θH +αl )mH − β bc = 0, the opti-
∗
contract, the LSP orders a quantity of q(mi ) products; otherwise, ∗ KebmSH S∗
S = p
mal initial payment MH 0 F (x )dx − wKe(b−θH −αl )mH , and
no trade will occur. Third, the supplier produces q(mi ) products at ∗ ∗
bmSH
a cost of c per unit. Fourth, the supplier delivers the products and the optimal order quantity qSH = Ke . (2) For the low-credit LSP,
∗ S∗
receives the initial payment Mi . Finally, the supplier receives the the optimal credit period mSL is given by equation bpF (KebmL ) −
∗ ∗
delayed payment at time mi and the trade ends. −(θL +αl )mSL −(θL +αs )mSL
(b − θL − αl )we + (b − θL − αs )we − bc = 0, the
∗
∗ bmS S∗
F (x )dx − wKe θH −αl )mH +
(
Ke L b−
optimal initial payment MLS = p 0
S∗ S∗
4. Model analysis wK e(b−θL −αl )mH − wK e(b−θL −αl )mL , and the optimal order quantity
∗ ∗
bmSL
qSL = Ke .
To increase its earnings and reduce its exposure to credit de-
fault risk from the LSP, the supplier adopts one of three strategies, Proposition 1 shows that the high-credit LSP’s optimal credit
namely, screening, censoring and factoring. Here, we focus on how period is determined not only by its own default risk but also by
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Fig. 2. Optimal credit period, initial payment and order quantity for each credit LSP under screening strategy.
that of the low-credit LSP. However, the low-credit LSP’s optimal lem is as follows:
credit period is determined exclusively by its own default risk. The ⎧
high-credit LSP’s optimal credit period is affected by the probabili-
⎪
⎨Mmax πsC = πsC1 (MHC , mCH ) + πsC2 (MLC , mCL ) − I
C
i
,mCi
ties that the supplier assigns to the LSP’s credit being high or low. subject to: (4)
However, the low-credit LSP’s optimal credit period is not affected ⎩IR-i π C MC , mC ≥ 0,
⎪
i ∈ {H, L}
li i i
by that likelihood. The primary reason for this difference is that to
reduce the incentive of the low-credit LSP to mimic a high-credit Proposition 2. Under the censoring strategy, (1) for the high-
∗
LSP to obtain a longer credit period, the supplier has to distort and credit LSP, the optimal credit period mCH is given by equation
limit the credit period offered to the high-credit LSP. C∗
(1 − β − λ + 2βλ )bpF (KebmH ) − (1 − β − λ + 2βλ )(b − θH −
Fig. 2 illustrates the results derived in Proposition 1 (param- C∗ C∗
eters include θH = 0.01, αl = 0.04, αs = 0.08, b = 0.8, β = 0.9, w =
αl )we−(θH +αl )mH + βλ(b − θH − αs )we−(θH +αs )mH + (1 − β − λ +
C∗
600, p = 620, c = 581, K = 50). Clearly, as θ L is increases, the high- βλ )(b − θL − αs )we−(θL +αs )mH − (1 − β − λ + 2βλ )bc = 0, the op-
∗
credit LSP’s credit period, initial payment and order quantity de- ∗ KebmCH C∗
timal initial payment MCH = p F (x )dx − wKe(b−θH −αl )mH ,
cease. Since θ H is fixed, an increasing θ L means a growing asym- 0
∗ ∗
bmCH
metric default risk between the two credit types of LSPs. To reduce and the optimal order quantity qCH = Ke . (2) For the
∗
losses and the incentive of the low-credit LSP to mimic, the sup- low-credit LSP, the optimal credit period mCL is given by
C∗
plier decreases the high-credit LSP’s credit period. In contrast, for equation (β + λ − 2βλ )bpF (KebmL ) − (β + λ − 2βλ )(b − θL −
∗ C∗
the low-credit LSP, the supplier maintains the credit period within −(θL +αl )mCL
αl )we + β (1 − λ )(b − θH − αs )we−(θH +αs )mL + (1 −
a certain range to encourage the low-credit LSP to choose the ap- ∗
β )λ(b − θL − αs )we−(θL +αs )mL − (β + λ − 2βλ )bc = 0, the optimal
C
propriate contract. However, the supplier also increases the low- ∗
∗ KebmCL C∗
credit LSP’s initial payment to guarantee a return on the credit initial payment MCL = p 0 F (x )dx − wKe(b−θL −αl )mL , and the
payment. Therefore, by differentially setting the contract terms, the ∗ C∗
optimal order quantity qCL = KebmL .
supplier can screen the two types of LSPs and maximize its profits.
Proposition 2 shows the supplier’s optimal contract terms for
each type of LSP. In contrast to Proposition 1 above, which shows
that only the high-credit LSP’s contract is affected by the low-
4.2. Case of censoring strategy (C) credit LSP’s participation, here, both types of LSP’s credit peri-
ods, initial payments and order quantities are influenced by the
In the censoring strategy, at the beginning of trading, the sup- proportion of the two types of LSPs. This is because the censor-
plier makes an effort to censor and assess the LSP’s financial ing process suffers from errors, which complicates the supplier’s
strength and credit status. However, identifying an LSP’s credit decision-making. However, it is easy to derive that as λ increases,
type is a difficult task because it is difficult to ensure that the the supplier approaches having perfect information and offers bet-
censoring result is absolutely accurate and censoring error exists. ter suited contract terms to each type of LSP.
Denote Pr(θ i |θ j ) as the conditional probability with that θ j is the Fig. 3 illustrates the results derived in Proposition 2 (param-
true credit type of an LSP and θ i as the censoring result, where i, eters include θH = 0.01, αl = 0.04, αs = 0.08, b = 0.8, β = 0.9, w =
j ∈ {H, L}. That is, P r (θi |θi ) = λ is the probability of accurate cen- 600, p = 620, c = 581, K = 50, λ = 0.95, I = 6). Surprisingly, in con-
soring, and P r (θi |θ j ) = 1 − λ is probability of inaccurate censoring, trast to the screening strategy in which the supplier screens be-
tween the two types of LSPs by restricting the high-credit LSP’s
where λ ∈ ( 21 , 1]. The higher the value of λ is, the more precise
credit period, the censoring strategy offers the supplier a new
the censoring result. Thus the supplier’s profit from the assumed
path to maximize its profits. Specifically, the supplier maintains
high credit type LSP is πsC1 (MH C , mC ) = β Pr (θ |θ )π C MC , mC +
H H H sH H H the high-credit LSP’s credit period within a certain range but in-
(1 − β ) Pr(θH |θL )πsLC MHC , mCH , and the profit from the assumed
creases the low-credit LSP’s credit period. It does so primarily be-
low credit type LSP is πsC2 (MLC , mCL ) = β Pr(θL |θH )πsH C M C , mC +
cause the censoring process offers the supplier a reference point
L L
(1 − β ) Pr(θL |θL )πsLC MLC , mCL . Moreover, the censoring process also to distinguish between the two types of LSPs, which provides the
inevitably incurs a censoring cost I. Therefore, the supplier’s prob- supplier with greater latitude to increase the credit period to en-
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Fig. 3. Optimal credit period, initial payment and order quantity for each credit LSP under censoring strategy.
courage the low-credit LSP to order more. Moreover, the supplier other. In contrast to these two strategies, the factoring strategy al-
also raises the amount of initial payment required from the low- lows the supplier to set the optimal credit period based solely on
credit LSP to ensure the repayment of part of the amount due. each type’s credit status. This is primarily because by factoring, the
supplier entrusts a third party (the factoring agent) to manage ac-
4.3. Case of factoring strategy (F) counts receivable. The third party then audits the LSP’s credit sta-
tus and sets a reasonable market-based interest rate to ensure its
The factoring strategy represents a means of transferring credit profits. Therefore, the supplier can satisfy its accounts receivable
risk by incurring an interest expense. Under this strategy, supplier and set contract terms according to the credit score of the LSP.
pays a premium to an insurance company. The insurance company Fig. 4 illustrates the results derived in Proposition 3 (param-
then pays the supplier the delayed portion of the payment if the eters include θH = 0.01, αl = 0.04, αs = 0.08, b = 0.8, β = 0.9, w =
LSP defaults. In other words, the supplier transfers the credit de- 600, p = 620, c = 581, K = 50, λ = 0.95, I = 6, r f = 0.0 0 01). In the
fault risk to the insurance company and incurs an insurance pre- factoring strategy, since the credit default risk is transferred to the
mium. As shown in Lai et al. [17], in a perfectly competitive in- factoring company, the supplier would be generous and grant a
surance market, it is clear that the insurance rate ri satisfies ri = longer credit period to the low-credit LSP to encourage it to or-
r f + 1 − e−θi mi , where rf is the risk-free interest rate. That is, the der more. Moreover, as θ L increases, although the supplier is not
factoring rate is equal to the risk-free rate rf plus the risk premium concerned about repayment, the supplier also raises the amount
of the initial payment to compensate for the factoring cost that
1 − e−θi mi . Hence, the supplier’s profit πsiF = MiF + wq(mFi )e−αs mi −
F
arises as the interest rate charged by the intermediary increases.
cq(mFi ) − ri wq(mFi )e−αs mi , where the superscript F denotes the fac-
F
In addition, the figure shows that, for a high-credit LSP, the opti-
toring strategy. Therefore, the supplier’s problem is: mal credit period, initial payment and order quantity are not im-
⎧ F F pacted by the low-credit LSP’s default risk coefficient. In contrast,
⎪
⎨Mmax
F ,mF
π F
s = βπsH
F
MH , mH + (1 − β )πsLF MLF , mFL for the low one, the optimal credit period, initial payment and or-
i i
subject to: (5) der quantity increase in its own default risk coefficient.
⎩IR-i π F MF , mF ≥ 0, i ∈ {H, L}.
⎪
li i i
Proposition 3. Under the factoring strategy, (1) for the high-credit 5. Analysis and comparison
∗ F∗
LSP, the optimal credit period mFH is given by bpF (KebmH ) −
F∗ F∗
(b − θH − αl )we−(θH +αl )mH + (b − θH − αs )we−(θH +αs )mH − Thus far, we have derived the optimal decisions in three cases.
F∗ In this section, we investigate the characteristics of each strategy in
bc − (b − αs )r f we−αs mH = 0, the optimal initial payment
∗ dealing with credit default risk in the presence of stochastic mar-
Ke
bmF
H
F∗ F∗ ket demand and asymmetric credit information. For the optimal
MH =p F (x )dx − wKe(b−θH −αl )mH , and the optimal order
0 decisions, we first compare the credit periods, the order quantities
∗ F∗
quantity qFH = KebmH . (2) For the low-credit LSP, the optimal credit and the initial payments under each strategy. Then, from an opera-
∗ F∗ F∗ tions perspective, we explore the impact of the operations param-
period mFL is given by bpF (KebmL ) − (b − θL − αl )we−(θL +αl )mL +
∗ ∗ eters on the credit period under each strategy.
(b − θL − αs )we−(θL +αs )mL − bc − (b − αs )r f we−αs mL = 0, the opti-
F F
∗
∗ KebmFL F∗
mal initial payment MLF = p 0 F (x )dx − wKe(b−θL −αl )mL , and
∗ F∗ 5.1. Comparison of the optimal credit periods
the optimal order quantity qFL = KebmL .
Proposition 3 shows the supplier’s optimal decision under the In this subsection, to better explore the differences in the opti-
factoring strategy. As noted above, the screening strategy means mal credit periods between the two types of LSPs and the charac-
that the high-credit LSP’s credit period is reduced to ensure the teristics of the above strategies, we first compare the credit periods
participation of the low-credit LSP, while in the censoring strat- between the two types of LSPs under each strategy and then com-
egy, the two types of LSPs’ optimal credit periods affect one an- pare the strategies for an LSP of a given type.
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Fig. 4. Optimal credit period, initial payment and order quantity for each credit LSP under factoring strategy.
Corollary 1. Comparing the credit periods between two types of LSPs fore, the credit period is longer under the censoring strategy than
∗ ∗ ∗ ∗ ∗
under each strategy, we have mSH < mSL , mCH < mCL and mFH < under the screening strategy.
F ∗
mL .
Corollary 1 shows that the optimal credit period for the high- 5.2. Comparison of the optimal order quantities
credit LSP is shorter than that of the low-credit LSP. Although the
same result holds in each strategy, the reasons that it does differ. In this subsection, we discuss the optimal order quantities for
Specifically, in the screening strategy, the credit information is the each type of LSP.
LSP’s private information, and the supplier does not have access to ∗ ∗
Corollary 3. (1) For the high-credit LSP, we have qSH < qCH .
this information beforehand. The low-credit LSP has strong motiva-
1 − β − λ + βλ C∗
tion to mimic the high type to obtain a longer credit period; to re- If r f < [(b − θH − αs )e−θH mH − (b − θL −
duce that motivation, the supplier has to limit the high-credit LSP’s
(b − αs )(1 − β − λ + 2βλ)
C∗ ∗ ∗
credit period but extend that of the low-credit LSP to inspire the αs )e−θL mH ], we have qCH < qFH . (2) For the low-credit LSP, we have
∗ ∗ ∗
low-credit LSP to choose its own option. In the censoring strategy, qFL < qSL < qCL .
since the censoring process provides certain information, to pro-
mote sales, the supplier offers the low-credit LSP a longer credit Corollary 3 shows the relationship of the order quantities
period but requires a higher initial payment to balance potential among the three strategies. Since the order quantity is a mono-
default losses. In contrast, for the high-credit LSP, due to censoring tonic function of the credit period, the analysis is analogous to that
error which inevitably incurs misjudgement, the credit period is shown in Corollary 2.
limited to reduce default risk. In the factoring strategy, the default
risk is transferred to the factoring company, but the factoring cost
5.3. Comparison of the optimal initial payments
of the low-credit LSP is higher than that of the high-credit LSP. To
compensate this cost and better maximize its profits, the supplier
In this subsection, we discuss the optimal initial payment for
strategically offers the low-credit LSP a longer credit period but a
each type of LSP.
higher initial payment compared to the high-credit LSP, which es-
sentially requires repayment early. Corollary 4. The comparison result about the optimal initial pay-
ments is similar to that of the optimal credit periods.
Corollary 2. For a specific type of LSP, we have the following
∗ ∗
results: (1) for the high-credit LSP, mSH < mCH , and if r f < A longer credit period offered to LSP would bring more credit
∗ ∗
−θH mCH −θL mCH
(1 − β − λ + βλ )((b − θH − αs )e − ( b − θ L − αs ) e ) default risk, thus, the supplier raises the initial payment to ensure
, part of revenue correspondingly.
(b − αs )(1 − β − λ + 2βλ)
∗ ∗
we have mCH < mFH ; (2) for the low-credit LSP, we have
∗ ∗ ∗
mL < mL < mCL
F S
5.4. Impact of the market sales price on the optimal credit period
Corollary 2 shows that for the high-credit LSP, the credit pe-
Below, we first discuss the effect of the market price p on the
riod is shorter under the screening strategy than under the cen-
credit period under each strategy. The result is formalized in the
soring strategy. This is because the censoring process provides the
following corollary.
supplier with certain information and greater latitude to extend
the credit period to incentivize sales. In addition, a lower risk- Corollary 5. For the high-credit LSP and the low-credit LSP, the opti-
free interest encourages the supplier to reduce the factoring pre- mal credit periods are both increasing in p under each strategy.
mium, which makes it substantially easier to extend the credit pe-
riod. Furthermore, for the low-credit LSP, since a longer credit pe- The reasoning for Corollary 5 is when the market price p in-
riod leads to a higher factoring premium, the supplier restricts the creases, the LSP can gain more revenue in the market. To better
credit period in the factoring strategy. Compared with the screen- extract the LSP’s profits, given the latter’s strong sales position, the
ing strategy, the censoring strategy can give the supplier more in- supplier offers a more generous credit period to encourage the LSP
formation to evaluate the low-credit LSP’s default risk, and there- to order and in turn increase credit sales.
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5.5. Impact of the wholesales price on the optimal credit period market expectation is less than the LSPs’ order quantity, since an
increasing σ alleviates some default risk by expanding the possibil-
We now analyze the impact of changes in the wholesales price ity of a higher market demand, the supplier will grant more credit
w on the credit period under the screening, censoring and factor- periods when σ increases.
ing strategies.
6. Numerical analysis and insights
Corollary 6. For both the high- and low-credit LSPs, the optimal
credit periods decrease in w under each strategy.
As mentioned above, the characteristics of each strategy in
Corollary 6 shows that as the wholesale price w increases, the dealing with credit default risk is investigated and compared.
LSP’s procurement cost also increases, which makes the LSP more In this section, we further explore how the supplier chooses
likely to incur default risk. Therefore, considering the potential among screening, censoring and factoring strategy under asymmet-
credit default losses, the supplier gradually reduces the credit pe- ric credit information and stochastic market demand. Note that the
riods for each type of LSP. proportion of the two types of LSPs β , the credit sales sensitivity
coefficient b and the default rate gap θ reflecting asymmetric de-
5.6. Impact of the production cost on the optimal credit period fault risk effect have a joint effect on the supplier’s profits under
all three strategies. To help understand the changes in the sup-
Finally, we turn our attention to how the production cost c af- plier’s mechanism selection and to gain managerial insights, it is
fects the credit period under each strategy. The result is formalized useful to graphically compare the possible equilibrium outcomes
in the following corollary. when these parameters change.
Corollary 7. For both the high- and low-credit LSP, the optimal credit 6.1. Equilibrium under the default rate gap and proportion of two
periods decrease in c under each strategy. credit types
Corollary 7 shows that as the production cost c increases, the

We first investigate the supplier’s strategy selection when both
supplier is more cautious about offering a longer credit period
the default rate gap θ and the proportion of two types of LSPs β
since its losses in the event of default by the LSP are tremendous
change. Here, we fix the high-credit LSP’s default rate θ H , and an
in this case. Therefore, the supplier reduces the credit period as c
increasing θ L means a growing default rate gap due to θ = θL − θH .
increases.
Fig. 5 illustrates the changes in and comparisons of the
supplier’s profits under each strategy (the parameters in-
5.7. Impact of the market demand on the optimal credit period clude θH = 0.01, b = 0.8, αl = 0.04, αs = 0.08, w = 600, p = 620, c =
580, K = 50, λ = 0.95, I = 6, r f = 0.0 0 01, ξ ∼ U[K, 2K]). When β is
Since the variation of market demand significantly influences relatively small (i.e., β = 0.15), there is a larger proportion of low-
the LSPs’ revenue or the repayment capacity, which in turn affects credit LSPs. That is, the supplier faces a huge default risk when
the supplier’s choice of credit strategy, in this subsection, we focus selling the product to the LSP through trade credit. The supplier
on how the stochastic demand influences the supplier’s decision. makes less profit under censoring strategy due to the censoring
Assume that μ is the mean value of the stochastic market demand accuracy and cost. Moreover, the growth in the factoring premium
and that σ is its variance. with an increasing θ L also keeps the supplier’s profit at a low
Corollary 8. Under each strategy, for both the high- and low-credit level. Thus, the supplier would rather pay the information rent
∗ from adopting the screening strategy to maximize its profits (i.e.,
LSP, the optimal credit periods increase in μ when μ ≥ K2 ebmi , de- ∗ ∗ ∗
∗
crease in μ when μ < K2 ebmi .
πsS > πsF > πsC ). When β takes the middle value (i.e., β = 0.5),
the two LSP types are in equal proportion. Although the supplier’s
Corollary 8 shows that when LSPs is serving a booming market, profit under screening strategy declines to a certain extent as θ L
that is, the expectation of market demand μ is relatively larger, to increases since the credit period offered to the high-credit LSP
promote sales, the supplier will grant more credit periods to in- needs to be limited to reduce the low type’s incentive to mimic the
spire LSPs to order more. Contrarily, when the market is not so high type, the screening strategy still brings the supplier a higher
∗ ∗ ∗
promising, to reduce default risk and guarantee repayment, the profit compared with the other strategies (i.e., πsS > πsF > πsC ).
supplier will limits credit periods under each strategy. When β is relatively large (i.e., β = 0.85), since the market is
nearly completely composed of high-credit LSPs, the supplier has
Corollary 9. Under each strategy, for both the high- and low-credit greater latitude to make full use of all three strategies. Specifically,
∗
LSP, when μ ≥ Kebmi , the optimal credit periods increase in σ if σ ≥ due to the high “density” of high-credit type LSPs, if the default
∗ ∗ ∗ ∗
K ebmi (2μ−K ebmi ) K ebmi (2μ−K ebmi )
bmi ∗
, decrease in σ when σ < bmi ∗
; when rate gap is relatively small, the supplier directly adopts the screen-
2(ln u−ln (u−Ke )) 2(ln u−ln (u−Ke ))
∗ ing strategy to avoid the additional expense (i.e., Region 1). If the
μ < Kebmi , the optimal credit periods increase in σ .
default rate gap increases, the supplier adopts the factoring strat-
Corollary 9 shows that when the market expectation is great egy to take advantage of the appropriate factoring cost to transfer
than the LSPs’ optimal order quantity, the supplier is more willing the default risk (i.e., Region 2). If the default rate gap is too large,
to grant more credit periods with the increasing in market vari- the supplier has the motivation to censor to identify the credit
ance. This is because the promising market expectation has already type of each LSP to better set appropriate contract terms to maxi-
given the supplier a certain confidence to assure LSP’s repayment. mize its profit (i.e., Region 3).
And an increasing σ will expand the possibility of a higher mar-
ket demand. Since the potential benefit brought from an increas- 6.2. Equilibrium under the default rate gap and credit sales
ing σ is greater than the potential risk, the supplier will elongate sensitivity coefficient
the credit periods to inspire LSPs to order more. Contrarily, if σ
is relatively small, a lower possibility of a higher market demand Now we explore the supplier’s strategy selection when both
induces the supplier to be more cautious. To reduce the probabil- the default rate gap θ and the credit sales sensitivity coefficient b
ity that the order quantity is larger than the market demand, the change. As mentioned above, the high-credit LSP’s default rate θ H
supplier will limit the credit periods with σ increasing. When the is fixed, and an increasing θ L means a growing default rate gap.
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Fig. 5. Comparison of the supplier’s optimal profit under each strategy for different proportion of credit types.
Fig. 6. Comparison of the supplier’s optimal profit under each strategy for different credit sales sensitivity coefficient.
Fig. 6 illustrates the changes in and comparisons of the adopts the screening strategy to reduce the additional expense
∗ ∗ ∗
supplier’s profits under each strategy (the parameters include (i.e., πsS > max{πsC , πsF }). However, when b becomes large, the
θH = 0.01, αl = 0.04, αs = 0.08, β = 0.85, w = 600, p = 620, c = supplier could better choose strategies. Specifically, a lower default
580, K = 50, λ = 0.95, I = 6, r f = 0.0 0 01, ξ ∼ U[K, 2K]). Intuitively, rate gap means a lower information rent, which inspires the
changes in the credit sales sensitivity coefficient b have a slight supplier to adopt the screening strategy (i.e., Region 1). Then, the
impact on the supplier’s optimal profit under the factoring strategy supplier chooses the factoring strategy since a moderate default
but a substantial impact on the supplier’s optimal profit under the rate gap implies a relatively more appropriate factoring cost to
screening and censoring strategies. This is mainly because for a transfer credit default risk (i.e., Region 2). When θ L is increasing,
given credit period, a higher credit sales sensitivity coefficient b a large default rate gap makes the two former strategies expen-
is accompanied with a strong incentive for the LSP to order more. sive, that is, a higher information rent and factoring cost. Hence,
In the screening and censoring strategies, although it bears the the supplier adopts the censoring strategy to take advantage of
credit default risk, the supplier also benefits from a high volume identification to optimize its own profit (i.e., Region 3).
of credit sales. By contrast, in the factoring strategy, due to the
transfer of default risk, the supplier has to pay a factoring pre-
6.3. Equilibrium under the stochastic demand
mium that is proportional to its credit sales. Thus, the changes in
the supplier’s profit under factoring strategy are less sensitive than
Finally, to better show the influence of stochastic demand on
those under the screening and censoring strategies. In addition,
the supplier’s strategy selection, we expand our investigation by
we arrive at a similar conclusion to that discussed previously. That
focusing on the mean value of the stochastic market demand μ
is, a relatively low or moderate b (i.e., b = 0.7) means a relatively
and its variance σ under the joint effect of stochastic market de-
weak incentive for the LSP to order more, so the supplier only
mand and asymmetric credit information.
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Fig. 7. Comparison of the supplier’s optimal profit under each strategy for different mean values of demand.
Fig. 7 illustrates the changes in and comparisons of the screening strategy (i.e., Region 1), then uses the factoring strategy
supplier’s profits under each strategy (the parameters include (i.e., Region 2), and finally adopts the censoring strategy (i.e.,
θH = 0.01, αl = 0.04, αs = 0.08, β = 0.8, b = 0.8, w = 300, p = Region 3). The supplier prefers to adopt the censoring strategy
70 0, c = 20 0, K = 50, λ = 0.8, I = 4, r f = 0.0 0 01, ξ ∼ N (u, 32 )). when θ L increases since a higher θ L raises information rent in the
When u is relatively small (i.e., u = 49), the expected market de- screening strategy and the insurance rate in the factoring strategy.
mand is relatively limited. The supplier first adopts the screening An increasing σ indicates a more volatile market condition, which
strategy when the gap between the two LSPs’ credit information is more likely to negatively affect LSPs’ repayment and increase
is relatively small and then the factoring strategy when the gap default risk. Thus, to distinguish the type of LSPs to better set the
increases. This is because a relatively small gap moderates the contract terms to reduce default risk, the supplier is more likely
supplier’s losses caused by LSPs’ camouflage; thus, the supplier to adopt the censoring strategy.
adopts a cheaper way to distinguish the type of LSPs. An increas-
ing θ L leads to an increasing information rent, which makes the
6.4. Equilibrium under other parameters
screening strategy expensive. Considering the relatively limited
market demand, the supplier prefers to transfer the default risk by
Then since the censoring accuracy λ, the censoring cost I and
adopting the factoring strategy. When u is increasing (i.e., u = 50
the risk-free interest rate rf play an important role in designing the
and u = 51), the expected market condition is promising. The
contract terms, we focus on how these parameters influence the
supplier can be flexible to take advantage of all three strategies. As
supplier’s strategy choice. Two intuitive conclusions can be formu-
previously discussed, with θ L increasing, the supplier first adopts
lated: (1) as the censoring accuracy λ increases and the censoring
the screening strategy (i.e., Region 1), then uses the factoring strat-
cost I decreases, the supplier becomes more willing to choose the
egy (i.e., Region 2), and finally adopts the censoring strategy (i.e.,
censoring strategy. This is mainly because when λ is increasing, the
Region 3). The censoring strategy becomes more preferable for the
supplier essentially has symmetric information regarding the LSP’s
supplier since although a promising market condition encourages
credit level, which makes the supplier’s profit converge toward the
the supplier to grant extended credit periods to inspire the LSPs
first-best outcome. When I is decreasing, the supplier faces a lower
to order more, the factoring cost increases in the amount needed
censoring cost, which improves its profits. (2) A lower risk-free in-
insurance. Thus, the supplier prefers to choose the censoring
terest rate rf encourages the supplier to adopt the factoring strat-
strategy to distinguish the type of LSPs to ensure repayment.
egy. Since the risk-free interest rate rf directly influences the fac-
Fig. 8 illustrates the comparisons of the supplier’s profits
toring premium, we can easily derive that the supplier’s profit un-
under each strategy (the parameters include θH = 0.01, αl =
der the factoring strategy increases as the risk-free interest rate rf
0.04, αs = 0.08, β = 0.8, b = 0.8, w = 300, p = 700, c = 200, K =
decreases.
50, λ = 0.8, I = 4, r f = 0.0 0 01, ξ ∼ N (50, σ 2 )). It is clear that the
supplier only adopts the screening strategy when σ is relatively
small (i.e., σ = 1). Since a small σ means that the market con- 7. “Retail+delivery” mode
dition is relatively stable, although an increasing θ L could lead
to a higher information rent, a stable market environment is Thus far, we have derived the strategy equilibrium of credit
beneficial for LSPs to attain a higher expected profit, which in turn sales when the express company serves as a common retailer (i.e.,
ensures the LSPs’ repayment and improves the supplier’s profit. “Retail” mode) since in practice, the retail format of express com-
Thus, the supplier could adopt a cheaper but efficient approach, panies has remained within the traditional retail category3 . Its re-
the screening strategy, to trade with LSPs. When σ is increasing tail form is dominated by small convenience stores near the com-
(i.e., σ = 2 and σ = 3), the market condition is more volatile. munity, and the commodities sold in local communities are mainly
The supplier becomes more cautious and chooses to take risk or fresh food, daily necessities and a small number of cross-border
transfer risk based on the cost of each strategy. The outcome is
still as above: with θ L increasing, the supplier first adopts the
3
http://www.linkshop.com.cn/web/archives/2018/399776.shtml.
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Fig. 8. Comparison of the supplier’s optimal profit under each strategy for different demand variance.
goods. Thus, the results derived in this paper may extend to gener- more credit periods to encourage the LSPs to order more. However,
alized retailing. However, when the express company offers value- when the stimulation intensity of express cost is relatively low (i.e.,
∗
F (Kebmi −d (T ))
added services for certain goods, that is, the delivery of these d
(T ) < ∗ ), the supplier will limit the credit peri-
goods to the homes of consumers around the community, this ( p−T ) f (Kebmi −d (T ))
ods to the LSPs. This is because although the logistics expense T
“Retail+Delivery” mode will have two effects on the express re-
is further invested, the stimulation effect is not satisfactory. It sug-
tail company. The positive effect is that it will improve the mar-
gests that the market may be relatively saturated or less sensitive
ket demand since it provides customers the convenience of both
to logistics investment, or there may be problems in logistics, such
the purchasing and delivery service. However, the negative effect
as excessive links, overpacking, and increasing logistics loss, which
is obvious due to the inevitable cost of the express service. T de-
influence the consumption experience and the market demand. At
notes the express cost for the unit realized market demand, and
this time, the supplier will constrain the credit periods to reduce
the increasing market demand d(T) is the function of T. Therefore,
potential default risk.
the expected profit of an LSP of each credit type can be expressed
Fig. 9 illustrates the comparisons of the supplier’s profits
as follows:
under each strategy (the parameters include θH = 0.01, αl =
πli = E[( p − T ) min{q(mi ), ξ + d (T )}] − Mi − wq(mi )e−(θi +αl )mi , 0.04, αs = 0.08, β = 0.85, b = 0.8, w = 600, p = 620, c = 580, K =
i ∈ {H, L}, (6) 50, λ = 0.95, I = 6, r f = 0.0 0 01, ξ ∼ U[K, 2K], d = T /3 − T 2 ). As
noted above, since the screening strategy adds no additional cost
where ξ + d (T ) denotes the increasing market demand and to the supplier except information rent, which increases in the
E[T min{q(mi ), ξ + d (T )}] represents the total express cost, which gap between two LSPs’ credit information, the supplier’s profit
depend on both realized demand and the available order quantity. under the screening strategy decreases in θ L . In contrast, the
The supplier’s profit function remains unchanged as noted above. advantage of the censoring strategy is gradually manifested since
Proceeding with the same model structure as constructed in the the greater the difference in credit type, the greater is the need
previous scenarios, the supplier’s problem and analytical solutions to pre-censor to reduce default losses caused by the low-credit
under each credit sales strategy are detailed in Appendix B. LSP’s camouflage. Thus, the supplier’s profit under the censoring
Corollary 10. Under each strategy, the optimal credit period mi ∗ for strategy increases in θ L . Due to the fair risk pricing mechanism,
the high- or low-credit LSPs increases in express cost T when d
(T ) ≥ the supplier’s profit under the factoring strategy remains almost
∗
F (Kebmi −d (T ))
∗
F (Kebmi −d (T )) unchanged. Additionally, with θ L increasing, the supplier first
∗ , decreases in T when d
(T ) < ∗ ,
( p−T ) f (Kebmi −d (T )) ( p−T ) f (Kebmi −d (T )) adopts the screening strategy to avoid the additional expense (i.e.,
respectively. Region 1), then uses the factoring strategy to take advantage of
the appropriate factoring cost to transfer the default risk (i.e.,
In practice, T reflects logistics cost, which includes loading and
Region 2), and finally adopts the censoring strategy to better set
unloading processing costs, distribution operating costs, logistics-
appropriate contract terms to maximize its profit (i.e., Region 3).
related labor costs and so on. When the stimulation intensity
Furthermore, from subfigures (a) to (c), with T increasing, the
of express cost to the market is relatively high (i.e., d
(T ) ≥
∗
F (Kebmi −d (T ))
supplier is more likely to adopt the screening strategy. This is
∗ ), the supplier will grant more credit periods to because although the positive effect of T is to increase demand,
( p−T ) f (Kebmi −d (T ))
the LSPs. This is because with T increasing, the express retail enter- which inspires the supplier to grant extended credit periods to the
prises can improve transport equipment and technical level to im- LSPs, the negative effect is to reduce sales margin, which increases
prove the efficiency of transport and handling, which is beneficial the LSPs’ repayment pressure. Thus, to balance profit and default
to the consumers and increases market demand. Thus, to maximize risk, the supplier is more willing to adopt a cheaper strategy to
its profit, the supplier is inspired by the promising market to grant trade with LSPs.
JID: OME
Fig. 9. Comparison of the supplier’s optimal profit under each strategy for different express costs.
8. Conclusions priate strategy based on the asymmetric default risk. Finally, the
influence of market demand is also investigated.
Express retail is a new tendency for logistics service providers Overall, this paper provides some significant insights for
(LSPs) to participate in the retail market and represents a new decision-makers in express retail. First, in the presence of an LSP
business mode to satisfy both purchase and logistics demand. In with stochastic market demand and asymmetric credit informa-
this paper, we model a supplier-LSP-customer chain to analyze the tion, we offer a guidance for the supplier on how to choose an ap-
joint effect of stochastic market demand and asymmetric credit in- propriate trade strategy from three widely used strategies for deal-
formation on the supplier’s credit sales. We also investigate three ing with potential credit default risk. Second, we identify theoreti-
strategies for dealing with credit default risk, that is, screening, cal rules that might be beneficial for practical application. That is,
censoring and factoring. For each strategy, we explore the sup- to maximize profits, for a given strategy, the supplier should pro-
plier’s optimal credit period and payment scheme under the credit vide a longer credit period to a low-credit type LSP than to a high-
sales policy. Moreover, we compare these optimal contract terms credit LSP. Third, the supplier can offer a contract in real-world or-
to analyze the characteristics of the three strategies when applied der allocation and design a reasonable credit period and payment
in trading with the LSP. We also establish conditions on the basis scheme that allow the supplier to optimize decisions and profits.
of which the supplier can decide which strategy to choose. Although this paper is motivated by current practices in the ex-
Our key findings can be summarized as follows. To maximize press retail industry, there are several limitations that deserve fur-
profits, under each strategy, the supplier offers a longer credit pe- ther investigation. First, in the censoring strategy, we assume that
riod to a low-credit LSP than to a high-credit LSP. Moreover, by the accuracy and cost of censoring are independent. One interest-
comparing the supplier’s profit obtained under each strategy, we ing direction for future study would be to explore how the sup-
establish conditions for the supplier to decide which strategy to plier would re-design the optimal contract terms under censoring
choose. Specifically, the tradeoff is based on six key factors: the and then select the best strategy if these two factors interacted
proportions of the two types of LSP, the sales incentive effect, the with one another. Second, we assume that the LSP’s credit status,
asymmetric default risk effect, the accuracy and cost of censoring, whether high or low, is its private information. However, credit
the risk-free interest rate and the market demand parameter. The status may not be limited to two types. Hence, another direction
influence of the last two factors are intuitive. High censoring accu- that deserves study is to investigate the case in which more credit
racy and a low censoring cost make the censoring strategy more statuses exist. Third, the impact of the express retail channel on
attractive. A low risk-free interest rate makes the factoring strat- the traditional retail channel is also an interesting extension that
egy more attractive. However, the roles of the former three factors should be pursued in future research.
are more complex and interesting. Furthermore, we find that it is
more beneficial for the supplier to choose the screening strategy Acknowledgments
when the market credit condition is not particularly good or when
offering a credit period has a limited positive effect on the LSP’s This work was supported by the National Natural Science Foun-
order quantity; otherwise, none of the three methods consistently dation of China under Grant No. 71771165.
outperforms the other two, and the supplier will select the appro-
JID: OME
Appendix A
Proof of proposition 1. Recall that q(mi ) = Kebmi ; the expected profit of an LSP of each credit type can be rearranged as follows:
Kebmi
πli = E[ p min{q(mi ), ξ }] − Mi − wq(mi )e−(θi +αl )mi = p F (x )dx − wKe(b−θi −αl )mi − Mi . (A.1)
0
The supplier’s problem, therefore, can be reformulated as follows:

⎧
⎪ max πsS = β (MHS + wKe(b−θH −αs )mH − cKebmH ) + (1 − β )(MLS + wKe(b−θL −αs )mL − cKebmL )
S S S S
⎪
⎪
⎪
⎪
M S ,mS ,M S ,mS
H H L L
⎪
⎪subject to:
⎪
⎪ KebmSH
⎪
⎪
⎪
⎪ F (x )dx − wKe(b−θH −αl )mH − MHS ≥ 0,
S
⎪
⎪
IR-H p
⎨ 0
bmS Ke L
(A.2)
F (x )dx − wKe(b−θL −αl )mL − MLS ≥ 0,
S
⎪
⎪
IR-L p
⎪
⎪ 0
⎪
⎪ KebmH S
KebmSL
⎪
⎪ F (x )dx − wKe ( b− θ − α ) m S
S
− MH ≥ p F (x )dx − wKe(b−θH −αl )mL − MLS ,
S
⎪
⎪IC-H p H l H
⎪
⎪ 0 0
⎪
⎪ KebmSL KebmSH
⎪
⎩IC-L p F (x )dx − wKe ( b− θ L − αl ) m S
S
L − M ≥ p F (x )dx − wKe(b−θL −αl )mH − MHS .
S
L
0 0
First, due to θ H < θ L , we can derive b − θH − αl > b − θL − αl . Thus, for the constraints (IR-H) and (IC-L), we have (IC-L) ≥ (IR-H), that
is
Ke
bmS
L Ke
bmS
H
F (x )dx − wKe(b−θL −αl )mL − MLS ≥ p F (x )dx − wKe(b−θL −αl )mH − MHS
S S
p
0 0
Ke
bmS
H
F (x )dx − wKe(b−θH −αl )mH − MHS .

S
≥ p (A.3)
0
In other words, the constraints (IR-H) and (IC-L) imply constraint (IR-L); therefore, (IR-L) is redundant. That is, if (IR-H) is satisfied, (IR-L)
must be met. Second, the ideal case for the supplier, in which the LSPs have no moral hazard of camouflage, should involve efficient con-
KebmSi
F (x )dx − wKe(b−θi −αl )mi . However, at this time, if the high-credit LSP
S
sumption and zero rents for both types of LSPs, that is, MiS = p 0
KebmSL KebmSL KebmSL
F (x )dx − wKe(b−θH −αl )mL − MLS = p 0 F (x )dx − wKe(b−θH −αl )mL − ( p 0
S S
chooses to mimic the low-credit LSP, since p 0 F (x )dx −
wKe(b−θL −αl )mL ) = wKe(b−θL −αl )mL − wKe(b−θH −αl )mL < 0, the type θ H will not find it attractive to mimic the low-credit LSP due to the
S S S
KebmSH bmS
F (x )dx − wKe(b−θL −αl )mH − MH
S = p Ke H F (x )dx − wKe (b−θL −αl )mSH −
S
negative payoff. Instead, for the low-credit type LSP, since p 0 0
KebmSH (b−θH −αl )mSH (b−θH −αl )mSH (b−θL −αl )mSH
(p 0 F (x )dx − wKe ) = wKe − wKe > 0, the low-credit LSP can receive a positive surplus by mimick-
ing the high-credit LSP. Thus, we omit constraint (IC-H). One can verify that the omitted constraint is indeed optimally satisfied later.
Third, the inequalities of constraints (IR-H) and (IC-L) must both be binding at the optimal solution. Specifically, constraint (IC-L) will
bind at the optimum; otherwise, the supplier can raise MLS until it does bind: this step leaves constraint (IR-H) unaffected while improving
the maximand. Constraint (IR-H) will also bind; otherwise, the supplier can raise MH S until it does bind: this step in fact relaxes constraint
(IC-L) while improving the maximand. That is, by increasing the initial payment MiS until the constraints become binding, the supplier can
always improve profit function. Thus, we have
Ke
bmS
H
F (x )dx − wKe(b−θH −αl )mH ,

S
MHS = p (A.4)
0
Ke
bmS
L Ke
bmS
H
F (x )dx − wKe(b−θL −αl )mL − MLS = p F (x )dx − wKe(b−θL −αl )mH − MHS .
S S
p (A.5)
0 0
Substituting Eq. A.4 into A.5 and rearranging the equation, we have
Ke
bmS
L
F (x )dx − wKe(b−θH −αl )mH + wKe(b−θL −αl )mH − wKe(b−θL −αl )mL .
S S S
MLS =p (A.6)
0
Therefore, the supplier’s profit can be reformulated as

Ke
bmS
H
πsS = β p F (x )dx + wKe(b−θH −α ) − wKe(b−θH −α ) + (1 − β )

S S
s mH l mH bmSH
− cKe
0

Ke
bmS
L
F (x )dx + wKe(b−θL −αl )mH − wKe(b−θH −αl )mH + wKe(b−θL −αs )mL
S S S
× p
0

− wK e(b−θL −αl )mL − cK ebmL .
S S
(A.7)
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Taking the second-order partial derivative of πsS with respect to (mSH , mSL ), we have
∂ 2 πsS
= β pKb2 ebmH (F (KebmH ) − KebmH f (KebmH )) − wKe(b−θH )mH ((b − θH − αl )2
S S S S S
S2
∂ mH
S
× e−αl mH − (b − θH − αs )2 e−αs mH ) − b2 cKebmH + (1 − β )wKe(b−αl )mH
S S S

× (b − θL − αl )2 e−θL mH − (b − θH − αl )2 e−θH mH ,
S S
(A.8)
∂ 2 πsS
= (1 − β ) pKb2 ebmL (F (KebmL ) − KebmL f (KebmL )) − b2 cKebmL
S S S S S
2
∂ mL S

− wKe(b−θL )mL ((b − θL − αl )2 e−αl mL − (b − θL − αs )2 e−αs mL ) ,
S S S
(A.9)
∂ 2 πsS
= 0. (A.10)
∂ mSH ∂ mSL
Since b − θH − αl > b − θH − αs , b − θH − αl > b − θL − αl , b − θL − αl > b − θL − αs , e(b−θH −αl )mH > e(b−θH −αs )mH , we have e−αl mH (b − θH −
S S S
−αs mSH
)2 e−θL mH )2 e−θH mH )2 e−αl mL )2 e−αs mL
S S S S
αl )2 −e ( b − θ H − αs )2 > 0 , ( b − θ L − αl − ( b − θ H − αl < 0 , ( b − θ L − αl − ( b − θ L − αs > 0. Besides,
bmS bmS
bmSi bmSi bmSi bmSi f (K e
i ) bmSi bmSi S
F (Ke ) − Ke f (Ke ) = F (Ke )(1 − Ke
) = F (K e )(1 − H (Ke )). Recall that H(x) is increasing in x, and Kebmi ≥ K, we
i
bmS
F (Ke i )
S
can derive that H (Kebmi ) ≥ H (K ). Since K is the LSP’s basic order quantity to fulfill the potential sales quota, which reflects the likeliest
market demand, at this point, the probability density of K should be large enough to satisfy f(K) ≥ 1/K, which is easy to satisfy with a
K f (K ) S S S S
larger K. Thus, we have H (K ) = > K f (K ) ≥ 1, and 1 − H (Kebmi ) < 0. That is, we have F (Kebmi ) − Kebmi f (Kebmi ) < 0. Then, we can
F (K )
∂ 2 πsS ∂ 2 πsS
derive that 2 < 0 and 2 < 0. Therefore, the Hessian matrix associated with πsS (mSH , mSL ) is negative definite. Hence, according to the
∂ mSH ∂ mSL
∗ ∗
first-order conditions, the optimal contract solutions mSH and mSL after simplifying satisfy the following equations, respectively:
S∗ S∗ S∗
β bpF (KebmH ) + β (b − θH − αs )we−(θH +αs )mH + (1 − β )(b − θL − αl )we−(θL +αl )mH
S∗
− (b − θH − αl )we−(θH +αl )mH − β bc = 0, (A.11)
S∗ S∗ S∗
bpF (KebmL ) − (b − θL − αl )we−(θL +αl )mL + (b − θL − αs )we−(θL +αs )mL − bc = 0. (A.12)
∗ ∗
Correspondingly, from Eqs. A.4 and A.6, we can determine the optimal initial payment (MHS , MLS ), and from q(mi ) = Kebmi , we have
∗ ∗
(qSH , qSL ).End of the proof.
Proof of proposition 2. The supplier’s expected profit under the censoring strategy can be reformulated as πsC = βλ(MCH +
wK e(b−θH −αs )mH − cK ebmH ) + (1 − β )(1 − λ )(MCH + wK e(b−θL −αs )mH − cK ebmH ) + β (1 − λ )(MCL + wK e(b−θH −αs )mL − cK ebmL ) + (1 − β )λ(MCL +
C C C C C C
KebmCi
wK e(b−θL −αs )mL − cK ebmL ) − I, subject to πliC = p 0 F (x )dx − wKe(b−θi −αl )mi − MCi ≥ 0. By increasing the initial payment MCi until the
C C C
constraints become binding, the supplier can always improve the profit function. Thus, the inequality constraint (IR-i) must be binding at
the optimal solution, and we have
Ke
bmC
i
F (x )dx − wKe(b−θi −αl )mi .

C
MCi =p (A.13)
0
Substituting Eq. A.13 into the supplier’s profit function, the resulting πsC (mCH , mCL ) is

Ke
bmC
H
πsC = βλ p F (x )dx + wKe(b−θH −α ) − wKe(b−θH −α ) + (1 − β )

C C
s mH l mH bmCH
− cKe
0

Ke
bmC
H
(b−θL −αs )mCH (b−θH −αl )mCH
× (1 − λ ) p F (x )dx + wKe − wKe − cKe bmCH
+β
0

Ke
bmC
L
(b−θH −αs )mCL (b−θL −αl )mCL
× (1 − λ ) p F (x )dx + wKe − wKe − cKe bmCL
+λ
0

Ke
bmC
L
× (1 − β ) p F (x )dx + wKe(b−θL −α ) − wKe(b−θL −α )

C C
s mL l mL bmCL
− cKe − I. (A.14)
0
Taking the second-order partial derivative of πsC with respect to (mCH , mCL ), we have
JID: OME
∂ 2 πsC
= βλ pKb2 ebmH (F (KebmH ) − KebmH f (KebmH )) − wKe(b−θH )mH ((b − θH − αl )2
C C C C C
2
∂ mCH
C
× e−αl mH − (b − θH − αs )2 e−αs mH ) − b2 cKebmH + (1 − β )(1 − λ )
C C

pKb2 ebmH (F (KebmH ) − KebmH f (KebmH )) + wK (b − θL − αs )2 e(b−θL −αs )mH
C C C C C

− wK (b − θH − αl )2 e(b−θH −αl )mH − b2 cKebmH ,
C C
(A.15)
∂ 2 πsC
= β (1 − λ ) pKb2 ebmL (F (KebmL ) − KebmL f (KebmL )) − b2 cKebmL
C C C C C
2
∂ mCL

− wK (b − θL − αl )2 e(b−θL −αl )mL + wK (b − θH − αs )2 e(b−θH −αs )mL + (1 − β )λ
C C

× pKb2 ebmL (F (KebmL ) − KebmL f (KebmL )) + wK (b − θL − αs )2 e(b−θL −αs )mL
C C C C C

− wK (b − θL − αl )2 e(b−θL −αl )mL − b2 cKebmL ,
C C
(A.16)
∂ 2 πsC
= 0. (A.17)
∂ mCH ∂ mCL
Since b − θH − αl > b − θH − αs , b − θH − αl > b − θL − αs , we can derive (b − θH − αl )2 e(b−θH −αl )mH > (b − θH − αs )2 e(b−θH −αs )mH , (b − θH −
C C
(b−θH −αl )mCH (b−θL −αs )mCH

αl ) 2 e > ( b − θ L − αs ) 2 e . And due to b − θL − αl > b − θL − αs and b − θL − αl > b − θH − αs under the condition of
α > θ , we have (b − θL − αl )2 e(b−θL −αl )mL > (b − θL − αs )2 e(b−θL −αs )mL , (b − θL − αl )2 e(b−θL −αl )mL > (b − θH − αs )2 e(b−θH −αs )mL . Proceeding
C C C C
C C C C C C
the same processes as mentioned above, we have F (KebmH ) − KebmH f (KebmH ) < 0 and F (KebmL ) − KebmL f (KebmL ) < 0. Therefore, we have
∂ 2 πsC ∂ 2 πsC
< 0, < 0 and the Hessian matrix associated with πsC (mCH , mCL ) is negative definite. Hence, according to the first-order conditions,
∂ mH C2 C2∂ mL
∗ ∗
the optimal contract solutions mCH and mCL after simplifying satisfy the following equations, respectively.
C∗ C∗
(1 − β − λ + 2βλ )bpF (KebmH ) − (1 − β − λ + 2βλ )(b − θH − αl )we−(θH +αl )mH
C∗
+ βλ(b − θH − αs )we−(θH +α ) s mH
+ (1 − β − λ + βλ )(b − θL − αs )w
∗
−(θL +αs )mCH
×e − (1 − β − λ + 2βλ )bc = 0, (A.18)
C∗ C∗
(β + λ − 2βλ )bpF (KebmL ) − (β + λ − 2βλ )(b − θL − αl )we−(θL +αl )mL
C∗ C∗
+ β (1 − λ )(b − θH − αs )we−(θH +αs )mL + (1 − β )λ(b − θL − αs )we−(θL +αs )mL
− (β + λ − 2βλ )bc = 0. (A.19)
∗ ∗ ∗ ∗
Correspondingly, from Eqs. A.13, we can determine the optimal initial payment (MCH , MCL ), and from q(mi ) = Kebmi , we have (qCH , qCL ).
End of the proof.
Proof of proposition 3. The supplier’s expected profit under the factoring strategy can be reformulated as πsF =
−αs mFH −αs mFH −αs mFL −αs mFL
β (MHF + wq(mFH )e − cq(mFH ) − rH wq(mFH )e ) + (1 − β )(MLF + wq(mFL )e − cq(mFL ) − rL wq(mFL )e ), subject to πliF =
KebmFi (b−θi −αl )mFi
p 0 F (x )dx − wKe − MiF ≥ 0. Similarly, increasing the initial payment MH F and M F until the constraints become binding,
L
the supplier can always improve profit function. Thus, the inequality constraint (IR-i) must be binding at the optimal solution, and we
have
Ke
bmF
i
F (x )dx − wKe(b−θi −αl )mi .

F
MiF = p (A.20)
0
Then, by substituting the binding constraints into the objective function, we can show that the resulting supplier’s profit has an objective
πsF as
Ke
bmF
H
πsF = β p F (x )dx + wKe(b−θH −αs )mH − wKe(b−θH −αl )mH − cKebmH

F F F
0
Ke
bmF
L
(b−αs )mFH
+ (1 − β ) p F (x )dx + wKe(b−θL −αs )mL
F
− r f wKe
0

− wK e(b−θL −αl )mL − cK ebmL − r f wK e(b−αs )mL .
F F F
(A.21)
Taking the second-order partial derivative of πsF with respect to (mFH , mFL ), we have
JID: OME
∂ 2 πsF
= β pKb2 ebmH (F (KebmH ) − KebmH f (KebmH )) − (b − αs )2 r f wKe(b−αs )mH
F F F F F
2
∂ mFH

− wKe(b−θH )mH ((b − θH − αl )2 e−αl mH − (b − θH − αs )2 e−αs mH ) − b2 cKebmH ,
F F F F
(A.22)
∂ 2 πsF
= (1 − β ) pKb2 ebmL (F (KebmL ) − KebmL f (KebmL )) − (b − αs )2 r f wKe(b−αs )mL
F F F F F
2
∂ mL F
F
−wKe(b−θL )mL ((b − θL − αl )2 e−αl mL − (b − θL − αs )2 e−αs mL ) − b2 cKebmL ,
F F F
(A.23)
Since b − θH − αl > b − θH − αs , b − θL − αl > b − θL − αs , we can derive (b − θH − αl )2 e(b−θH −αl )mH > (b − θH − αs )2 e(b−θH −αs )mH , (b − θL −
F F
αl )2 e(b−θL −αl )mL > (b − θL − αs )2 e(b−θL −αs )mL . Using the same processes as discussed above, we have F (KebmH ) − KebmH f (KebmH ) < 0 and
F F F F F
F F F ∂ πs
2 F ∂ πs
2 F
F (Ke bmL
) − Ke
bmL bmL
f (Ke ) < 0. Therefore, we have 2 < 0, F
2 < 0, and the Hessian matrix associated with πs (mH , mL ) is negative
F F
∂ mFH ∂ mFL
∗ ∗
definite. According to the first-order conditions, the optimal contract solutions mFH and mFL after simplifying satisfy the following equa-
tions, respectively:
F∗ F∗ F∗
bpF (KebmH ) − (b − θH − αl )we−(θH +αl )mH + (b − θH − αs )we−(θH +αs )mH
F∗
− bc − (b − αs )r f we−αs mH = 0, (A.24)
F∗ F∗ F∗
bpF (KebmL ) − (b − θL − αl )we−(θL +αl )mL + (b − θL − αs )we−(θL +αs )mL
F∗
− bc − (b − αs )r f we−αs mL = 0. (A.25)
∗ ∗ ∗ ∗
Correspondingly, from Eqs. A.20, we can determine the optimal initial payment (MH
F , MF ), and from q (m ) = Kebmi , we have (qF , qF ).
L i H L
End of the proof.
∗ ∗ ∗ S∗
Proof of corollary 1. (1) First, we compare mSH with mSL . From Proposition 1, mSH is solved by β bpF (KebmH ) + β (b − θH −
∗ ∗ ∗
−(θH +αs )mSH −(θL +αl )mSH −(θH +αl )mSH
αs )we + (1 − β )(b − θL − αl )we − (b − θH − αl )we − β bc = 0. Rearranging the equation, we have
∗ S∗ S∗
bpF (Ke ) + (b − θH − αs )we−(θH +α ) − (b − θH − αl )we−(θH +α )
bmSH s mH l mH
1−β S∗ S∗
− bc − [(b − θH − αl )we−(θH +αl )mH − (b − θL − αl )we−(θL +αl )mH ] = 0. (A.26)
β
∗
Define function N (m ) = ebm [bpF (Kebm ) − (b − θL − αl )we−(θL +αl )m + (b − θL − αs )we−(θL +αs )m − bc]. From proposition 1, we know N (mSL ) =
∗ ∗
0. However, for N (mSH ), substituting the Eq. A.26 into N (mSH ) and rearranging, we have
∗ S∗ S∗ S∗ S∗
N (mSH ) = ebmH [bpF (KebmH ) − (b − θL − αl )we−(θL +αl )mH + (b − θL − αs )we−(θL +αs )mH − bc]
S∗ S∗ S∗
= ebmH [(b − θH − αl )we−(θH +αl )mH − (b − θH − αs )we−(θH +αs )mH
1−β S∗ S∗
+ [(b − θH − αl )we−(θH +αl )mH − (b − θL − αl )we−(θL +αl )mH ]
β
S∗ S∗
− (b − θL − αl )we−(θL +αl )mH + (b − θL − αs )we−(θL +αs )mH ]
S ∗ 1 S∗ S∗
= ebmH [(b − θH − αl )we−(θH +αl )mH − (b − θL − αl )we−(θL +αl )mH ]
β
S∗ S∗
+ [(b − θL − αs )we−(θL +αs )mH − (b − θH − αs )we−(θH +αs )mH ] . (A.27)
∗ ∗
−(x+αl )mSH −(x+αs )mSH
Then, we define function N N (x ) = β1 (b − x − αl )we − (b − x − αs )we , and the first derivative of NN(x) is that
dNN 1 S∗ 1 S∗ ∗ S∗
= − we−(x+αl )mH + (b − x − αl )we−(x+αl )mH (−mSH ) − [−we−(x+αs )mH
dx β β
S∗ ∗
+ (b − x − αs )we−(x+αs )mH (−mSH )]
∗
1 S∗ S∗ mSH S∗
=− we−(x+αl )mH + we−(x+αs )mH − (b − x − αl )we−(x+αl )mH
β β
S∗
∗
−(x+αs )mSH
+ (b − x − αs )we ( mH ). (A.28)
∗
S∗ S∗ mSH S∗ S∗ ∗
Since β1 ≥ 1, α s ≥ α l , we have β1 we−(x+αl )mH ≥ we−(x+αs )mH , β (b − x − αl )we−(x+αl )mH ≥ (b − x − αs )we−(x+αs )mH (mSH ). Thus, we have
∗ S∗
dNN
dx
≤ 0. That is, NN(x) decreases in x. Since θ H < θ L , we have NN(θ H ) > NN(θ L ). Then, we can further derive N (mSH ) = ebmH (NN (θH ) −
∂ 2 πsS ∂ 2 πsS
N N (θL )) > 0. In addition, one can easily find that dN
dm
= 2 . Recall that from Proposition 1,
dN
2 < 0; thus, dm < 0. That is, N(m) decreases
∂ mSL ∂ mSL
∗ ∗ ∗ ∗
in m. Then because N (mSH ) > 0, N (mSL ) = 0, N(m) decreases in m, we can derive that mSH < mSL .
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∗ ∗ ∗
(2) Second, we compare mCH with mCL . From Proposition 2, mCL is solved by the Eq. A.19. After reformulating this equation, we have
C∗ C∗ C∗
bpF̄ (KebmL ) − (b − θL − αl )we−(θL +αl )mL + (b − θL − αs )we−(θL +αs )mL − bc
β (1 − λ ) C∗ C∗
+ [(b − θH − αs )we−(θH +αs )mL − (b − θL − αs )we−(θL +αs )mL ] = 0. (A.29)
(β + λ − 2βλ )
1−β −λ+βλ
Define function L(m ) = ebm [bpF̄ (Kebm ) − (b − θH − αl )we−(θH +αl )m + (b − θH − αs )we−(θH +αs )m − bc − 1−β −λ+2βλ
[ ( b − θH −
∗ ∗
αs )we−(θH +αs )m − (b − θL − αs )we−(θL +αs )m ]]. From Proposition 2, we can have L(mCH ) = 0. However, for L(mL ), substituting the
C
∗
Eq. A.29 into L(mCL ) and rearranging, we have
∗ C∗ C∗ C∗ C∗
L(mCL ) = ebmL bpF̄ (KebmL ) − (b − θH − αl )we−(θH +αl )mL + (b − θH − αs )we−(θH +αs )mL
1 − β − λ + βλ C∗ C∗
− bc − [(b − θH − αs )we−(θH +αs )mL − (b − θL − αs )we−(θL +αs )mL ]
1 − β − λ + 2βλ
C∗ C∗ C∗
= ebmL (b − θL − αl )we−(θL +αl )mL − (b − θL − αs )we−(θL +αs )mL
β (1 − λ ) C∗ C∗
− [(b − θH − αs )we−(θH +αs )mL − (b − θL − αs )we−(θL +αs )mL ]
(β + λ − 2βλ )
C∗ C∗
− (b − θH − αl )we−(θH +αl )mL + (b − θH − αs )we−(θH +αs )mL
1 − β − λ + βλ C∗ C∗
− [(b − θH − αs )we−(θH +αs )mL − (b − θL − αs )we−(θL +αs )mL ] . (A.30)
1 − β − λ + 2βλ
C∗ C∗
Then, we define function M (x ) = (b − x − αl )we−(x+αl )mL − (b − x − αs )we−(x+αs )mL , and the first derivative of M(x) is that
dM C∗ C∗ ∗ C∗
= −we−(x+αl )mL + (b − x − αl )we−(x+αl )mL (−mCL ) − [−we−(x+αs )mL
dx
C∗ ∗
+ (b − x − αs )we−(x+αs )mL (−mCL )]. (A.31)
∗ ∗ ∗ ∗ ∗ ∗
−(x+αl )mCL −(x+αs )mCL −(x+αl )mCL −(x+αs )mCL
Since α s ≥ α l , we have we ≥ we , (b − x − αl )we ≥ (b − x − αs )we (mCL ) (mCL ). Thus, we have ddMx ≤ 0.
∗ C∗
That is, M(x) decreases in x. Since θ H < θ L , we have M(θ H ) > M(θ L ). Then we can further have L(mCL ) = ebmL (M (θL ) − M (θH ) −
∗ C∗ ∗ C∗
β (1−λ )
(β +λ−2βλ ) [ (b − θH − αs )we
−(θH +αs )mCL
− (b − θL − αs )we−(θL +αs )mL ] − 11−−ββ−−λλ+2
+βλ
βλ [(b − θH − αs )we
−(θH +αs )mCL
− (b − θL − αs )we−(θL +αs )mL ] ).
∗ ∗
Recall that θ H < θ L , we can derive that (b − θH − αs )we−(θH +αs )mL − (b − θL − αs )we−(θL +αs )mL > 0. And β + λ − 2βλ = β (1 − λ ) + λ(1 −
C C
β ) > 0, 1 − β − λ + βλ = (1 − β )(1 − λ ) ≥ 0, thus, we can derive that L(mCL ) < 0. In addition, one can easily find that ddmL = ∂ πC s2 . Recall
∗ 2 C
∂m H
∂ 2 πsC C∗ C∗
2 < 0; thus, dm < 0. That is, L(m) decreases in m. Because L (mH ) = 0, L (mL ) < 0, we can derive that
dL
that from Proposition 2,
∂ mCH
∗ ∗
mCL > mCH .
∗ ∗
(3) Finally, we compare mFH with mFL . Proceeding with the same processes as above, since the proof is similar to the proofs of (1) and
F ∗ F ∗
(2), we can derive that mL > mH and omit the prolix demonstration processes, which completes the proof.
Proof of corollary 3. (1) The optimal credit periods for the high-credit level LSP under three strategies satisfy following equations. Specif-
∗
ically, mSH is solved by
S∗ S∗ S∗
β bpF (KebmH ) + β (b − θH − αs )we−(θH +αs )mH + (1 − β )(b − θL − αl )we−(θL +αl )mH
S∗
− (b − θH − αl )we−(θH +αl )mH − β bc = 0, (A.32)
Rearranging the equation, we have
S∗ S∗ S∗
bpF (KebmH ) − (b − θH − αl )we−(θH +αl )mH + (b − θH − αs )we−(θH +αs )mH − bc
1−β S∗ S∗
− [(b − θH − αl )we−(θH +αl )mH − (b − θL − αl )we−(θL +αl )mH ] = 0. (A.33)
β
∗
mCH is solved by
C∗ C∗
(1 − β − λ + 2βλ )bpF (KebmH ) − (1 − β − λ + 2βλ )(b − θH − αl )we−(θH +αl )mH
C∗
+ βλ(b − θH − αs )we−(θH +αs )mH + (1 − β − λ + βλ )(b − θL − αs )w
C∗
× e − ( θL + α ) s mH
− (1 − β − λ + 2βλ )bc = 0. (A.34)
Rearranging the equation, we have
C∗ C∗ C∗
bpF̄ (K ebmH ) − (b − θH − αl )we−(θH +αl )mH + (b − θH − αs )we−(θH +αs )mH − bc
1 − β − λ + βλ C∗ C∗
− [(b − θH − αs )we−(θH +αs )mH − (b − θL − αs )we−(θL +αs )mH ] = 0. (A.35)
1 − β − λ + 2βλ
β
Define function V (m ) = bpF (Kebm ) − (b − θH − αl )we−(θH +αl )m + (b − θH − αs )we−(θH +αs )m − bc − 1−
β [(b − θH − αl )we
−(θH +αl )m − (b − θ −
L
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∗ ∗ ∗
αl )we−(θL +αl )m ]. V (mSH ) = 0. However, for V (mCH ), substituting the Eq. A.35 into V (mCH ) and rearranging, we have
∗ 1 − β − λ + βλ C∗ C∗
V (mCH ) = [(b − θH − αs )we−(θH +αs )mH − (b − θL − αs )we−(θL +αs )mH ]
1 − β − λ + 2βλ
1−β C∗ C∗
− [(b − θH − αl )we−(θH +αl )mH − (b − θL − αl )we−(θL +αl )mH ]. (A.36)
β
∗ C∗
1−β −λ+βλ β
(b − x − αs )we−(x+αs )mH −(x+αl )mH
C
Then, we define function V V (x ) = 1−β −λ+2βλ
− 1−
β (b − x − αl )we . The first derivative of VV(x) is that
dV V 1 − β − λ + βλ C∗ C∗ ∗
= [−we−(x+αs )mH + (b − x − αs )we−(x+αs )mH (−mCH )]
dx 1 − β − λ + 2βλ
1−β C∗ C∗ ∗
− [−we−(x+αl )mH + (b − x − αl )we−(x+αl )mH (−mCH )]
β
1 − β − λ + βλ C∗ 1−β C∗ 1 − β − λ + βλ
=− we−(x+αs )mH + we−(x+αl )mH −
1 − β − λ + 2βλ β 1 − β − λ + 2βλ
C∗ ∗ 1−β C∗ ∗
× (b − x − αs )we−(x+αs )mH (mCH ) + (b − x − αl )we−(x+αl )mH (mCH ). (A.37)
β
β 1−β −λ+βλ dV V
Similar to the previous discussion, and due to 1−
β > 1−β −λ+2βλ , one can easily derive that dx > 0. Thus, we have VV(θ H ) < VV(θ L ). Then,
∗ ∗ ∗ ∗ ∗
we can further derive V (mCH ) < 0. Additionally, since V(m) decreases in m and V (mCH ) < V (mSH ) = 0, we have mCH > mSH . Furthermore,
∗
from Proposition 3, mFH is solved by
F∗ F∗ F∗
bpF (KebmH ) − (b − θH − αl )we−(θH +αl )mH + (b − θH − αs )we−(θH +αs )mH
F∗
− bc − (b − αs )r f we−αs mH = 0. (A.38)
Proceeding with the same process as previously discussed, we have the following conclusion: when rf ≥
1−β −λ+βλ C∗ C∗ ∗ ∗ −β −λ+βλ C∗
(b−αs )(1−β −λ+2βλ ) [ (b − θH − αs )e−θH mH − (b − θL − αs )e−θL mH ], mCH ≥ mFH ; but when r f < (b−α1)( [(b − θH − αs )e−θH mH −
s 1−β −λ+2βλ )
C∗ ∗ ∗
(b − θL − αs )e−θL mH ], we
have mCH < mFH .
∗
(2) The optimal credit periods for the low-credit level LSP under three strategies satisfy the following equations. Specifically, mSL is
solved by
S∗ S∗ S∗
bpF (KebmL ) − (b − θL − αl )we−(θL +αl )mL + (b − θL − αs )we−(θL +αs )mL − bc = 0. (A.39)
∗
mCL is solved by
C∗ C∗
(β + λ − 2βλ )bpF (KebmL ) − (β + λ − 2βλ )(b − θL − αl )we−(θL +αl )mL
C∗ C∗
− β (1 − λ )(b − θH − αs )we−(θH +αs )mL + (1 − β )λ(b − θL − αs )we−(θL +αs )mL
− (β + λ − 2βλ )bc = 0. (A.40)
Rearranging the Eq. A.40, we have
C∗ C∗ C∗
bpF̄ (KebmL ) − (b − θL − αl )we−(θL +αl )mL + (b − θL − αs )we−(θL +αs )mL − bc
β (1 − λ ) C∗ C∗
+ [(b − θH − αs )we−(θH +αs )mL − (b − θL − αs )we−(θL +αs )mL ] = 0. (A.41)
(β + λ − 2βλ )
Define function Z (m ) = ebm [bpF (Kebm ) − (b − θL − αl )we−(θL +αl )m + (b − θL − αs )we−(θL +αs )m − bc]. Proceeding with the same proof process
C∗ C∗
as previously discussed, since it can easily be proved that (ββ+(λ1−2
−λ )
βλ ) [ (b − θH − αs )we
−(θH +αs )mL
− (b − θL − αs )we−(θL +αs )mL ] > 0, we can
∗ ∗ ∗ ∗ ∗
derive that Z(m) decreases in m. Because Z (mCL ) < Z (mSL ) = 0, we can further derive that mCL > mSL . Furthermore, mFL is solved by
F∗ F∗ F∗
bpF (KebmL ) − (b − θL − αl )we−(θL +αl )mL + (b − θL − αs )we−(θL +αs )mL
F∗
− bc − (b − αs )r f we−αs mL = 0. (A.42)
∗ ∗ ∗ ∗ ∗ ∗
−αs mFL
Since Z(m) decreases in m and −(b − αs )r f we < 0, we can derive that mSL > mFL . Therefore, we have mFL < mSL < mCL , which com-
pletes the proof.
∗
1−β −λ+βλ
[(b − θH − αs )we−(θH +αs )mH − (b − θL
C
Proof of corollary 3. Since the order quantity increases in the credit period and 1−β −λ+2βλ
−
C∗ C∗ C∗
αs )we−(θL +αs )mH ] − 1−ββ [(b − θH − αl )we−(θH +αl )mH − (b − θL − αl )we−(θL +αl )mH ] < 0, qSH < qCH , and if r f < (b−α1s )(−β1−−βλ−+λβλ
∗ ∗
+2βλ)
[ ( b − θH −
C∗ C∗ ∗ ∗ ∗ ∗ ∗
αs )e−θH mH − (b − θL − αs )e−θL mH ], we have qCH < qFH ; for the low-credit level LSP, we have qFL < qSL < qCL
KebmH
Proof of corollary 4. The high-credit level LSP’s initial payment under each strategy can be formulated as MH = p 0 F (x )dx −
∂M ∂2M ∂M
wK e(b−θH −αl )mH . And ∂ mH = K ebmH [ pbF (KebmH ) − w(b − θH − αl )e(−θH −αl )mH ]. We can derive that ∂ m H2 < 0. When mH = 0, ∂ mH ≥ 0, and
H H H
∂M ∂M
when mH → ∞, ∂ mH ≥ 0; thus, we have ∂ mH ≥ 0, that is, MH increases in mH . Therefore, we have the same comparison result as shown
H H
in the credit periods. For the low-credit level LSP, proceeding with the same proof process as discussed for the high-credit level LSP, we
have the same conclusion as shown in Corollary 2, which completes the proof.
JID: OME
∗ β S∗ S∗ S∗
Proof of corollary 5. For mSH , we have bpF (KebmH ) − (b − θH − αl )we−(θH +αl )mH + (b − θH − αs )we−(θH +αs )mH − bc − 1−
β [ ( b − θH −
S∗ S∗ S∗ S∗ S∗
αl )we−(θH +αl )mH − (b − θL − αl )we−(θL +αl )mH ] = 0. Multiplying ebmH on both sides of the equation, we have bpebmH F (KebmH ) −
S∗ S∗ S∗ S∗ S∗
(b − θH − αl )we(b−θH −αl )mH + (b − θH − αs )we(b−θH −αs )mH − bcebmH − 1−ββ [(b − θH − αl )we(b−θH −αl )mH − (b − θL − αl )we(b−θL −αl )mH ] =
∗
∗ S∗ S∗ S∗ S∗ S∗ S∗ S∗ ∂ mS
0. Take derivation of mSH on p, we have bebmH F (KebmH ) + bp[bebmH F (KebmH ) − ebmH f (K ebmH )K ebmH b] ∂ pH − (b −
∗ ∗ ∗
∂ mSH S∗ ∗
(b−θH −αs )mSH ∂ mH
S ∗ ∂ mS
β ∗
θH − αl )2 we(b−θH −αl )mH ∂ p + (b − θH − αs ) we
2
∂ p − bce
bmSH
b ∂ pH − 1− β [(b − θH − αl ) we
2 (b−θH −αl )mSH
− ( b − θL −
∗ S∗ ∗ ∗ ∗ ∗ ∗ ∗
(b−θL −αl )mSH ∂ mH bmSH bmSH bmSH bmSH bmSH ∂ mSH
αl ) we
2 ] ∂ p = 0. Recall that [be F (Ke )−e f (K e )K e b] < 0. It is easy to find that if ∂ p < 0, the equation
∗
∂ mS
cannot hold. Thus, we can derive ∂ pH > 0. Proceeding with the similar proof process as previously discussed, we arrive at the same
conclusion for the rest cases. Therefore, for both the high-credit and low-credit level LSPs, the optimal credit periods increase in p under
each strategy.
Proof of corollary 5. The proof is similar to the proof of Corollary 5 and is thus omitted.
Proof of corollary 7. To explore how the mean value of the stochastic market demand μ and its variance σ influ-
ence the optimal credit periods, we introduce normal distribution to conduct our following analysis. The normal distribu-
Kebm − (x−μ)2
tion’s cumulative distribution function when ς = Kebm is that F (Kebm ) = √ 1 e 2σ 2 dx, and the corresponding prob-
0 2πσ
(Kebm −μ )2
−
ability density function is that f (Kebm ) = √1 e 2σ 2 . (1) Recall that in the screening strategy, the optimal credit pe-
2πσ
∗ S∗ S∗
riod for the high-credit level LSP satisfies β bpF (Ke bmSH
) + β (b − θH − αs )we−(θH +αs )mH + (1 − β )(b − θL − αl )we−(θL +αl )mH − (b −
∗
−(θH +αl )mSH
θH − αl )we − β bc = 0. Substituting the above normal distribution’s function forms into the implicit equation, mul-
S∗
tiplying two sides of the equation by ebmH and taking the derivative of equations with respect to μ, we can derive that
∗
∗ bmS
bmSH
∗ bmS
−
( x −μ ) 2 ∂ mSH
∗
∂ mSH bmSH
∗μ
− 2 −
(b−θH )mSH
(Ke
∗ H −μ ) 2
S∗
∗ 2
β b2 pe (1 − √1
2πσ 0
Ke H
e 2σ 2 dx ) ∂μ − β bpe ∂μ − 1 ) + 2πσ e
√1 2σ ) − β (we
( √21πσ e ((b −2σ 2 (KbebmH
S∗ ∗ ∗ ∂ mS ∗ ∗ ∗ ∗ ∂ mS ∗
θH − αl )2 e−αl mH − (b − θH − αs )2 e−αs mH ) − b2 cebmH ) ∂μH + (1 − β )we(b−αl )mH ((b − θL − αl )2 e−θL mH − (b − θH − αl )2 e−θH mH ) ∂μH = 0.
S S S S S
∗
∗ bmS
S∗ KebmSH −
( x −μ ) 2 S∗ −
(Ke H −μ ) 2
S∗ S∗
Denote ϕ = β ( pb2 ebmH ((1 − √1
2πσ 0 e 2σ 2 dx ) − KebmH √1
2πσ
e 2σ 2 ) − we(b−θH )mH ((b − θH − αl )2 e−αl mH − (b − θH −
∗
bmS
∗ ∗ ∗ ∗ ∗ ∗ (Ke H −μ ) 2 μ2
− −
)2 e−αs mH (b−αl )mSH
)2 e−θL mH )2 e−θH mH
S S S S bmSH
αs ) − b2 cebmH ) + (1 − β )we ((b − θL − αl − ( b − θ H − αl ), φ = √1
2πσ
β bpe (e 2σ 2 −e 2σ 2 ).
∗ ∗ ∗ ∗
∂ mS ∂ 2 πsS ∂ mS ∂ mS
Thus, ∂μH = −φϕ . From 2 < 0 we know −ϕ > 0. When μ≥ K bmSH
2e , φ ≥ 0, we have ∂μH ≥ 0. Otherwise, ∂μH < 0. (2) The op-
∂ mSH
∗ S∗ S∗
timal credit period for the low-credit level LSP satisfies bpF (Ke ) − (b − θL − αl )we−(θL +αl )mL + (b − θL − αs )we−(θL +αs )mL − bc = 0.
bmSL
S∗
Similarly, multiplying two sides of the equation by ebmL and taking the derivative of equations with respect to μ, we
∗
∗ bmS
S∗ KebmSL −
( x −μ ) 2 ∂ mS
∗
S∗ −
(Ke L −μ ) 2
S∗ ∂ mSL
∗ μ
− 2
2
S∗
have b2 pebmL (1 − √1
2πσ 0 e 2σ 2 dx ) ∂μL − bpebmL ( √ 1 e
2πσ
2σ 2 (KbebmL ∂μ − 1 ) + 2πσ e
√1 2σ ) − we(b−θL )mL ((b −
∗
∗ ∗ bmS
S∗ S∗ ∂ mSL ∗ S∗ (Ke L −μ )2 μ2 S∗
2 bmSL ∂ mL = 0.
S − −
θL − αl )2 e−αl mL − (b − θL − αs )2 e−αs mL ) ∂μ − b ce ∂μ Let = √1
2πσ
bpebmL (e 2σ 2 −e 2σ 2 ), = pb2 ebmL ((1 −
∗
∗ bmS
KebmSL −
( x −μ ) 2 ∗
−
(Ke L −μ ) 2
∂ mSL
∗
) − we(b−θL )mL ((b − θL − αl )2 e−αl mL − (b − θL − αs )2 e−αs mL ) − b2 cebmL . Thus,
S S S S S
√1 e 2σ 2 dx ) − KebmL √ 1 e 2σ 2
∂μ = − .
2πσ 0 2πσ
∗ ∗
∂ 2 πsS S∗ ∂ mSL ∂ mSL
From 2 < 0 we know that − > 0. When μ ≥ K2 ebmL , ≥ 0, we can derive ∂μ ≥ 0. Otherwise, ∂μ < 0. (3) For the censoring and
∂ mSL
factoring strategy, we can get the same conclusions as discussed above. The proof process is similar to the proof mentioned previously
and is thus omitted. We collect our conclusions as shown in Corollary 8.
Appendix B
(1) Screening strategy considering express cost

The expected profit of an LSP of each credit type can be rearranged as πli = E[( p − T ) min{q(mi ), ξ + d (T )}] − Mi − wq(mi )e−(θi +αl )mi =
bmi
( p − T ) 0Ke −d (T ) F (x )dx + ( p − T )d (T ) − wKe(b−θi −αl )mi − Mi .
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The supplier’s problem, therefore, can be reformulated as follows:

⎧
max πsS = β (MHS + wKe(b−θH −αs )mH − cKebmH ) + (1 − β )(MLS + wKe(b−θL −αs )mL − cKebmL )
S S S S
⎪
⎪
⎪ H H L L
⎪M S ,mS ,M S ,mS
⎪
⎪
⎪subject to:
⎪
⎪
⎪ bmSH
⎪IR-H ( p − T ) Ke −d(T ) F (x )dx + ( p − T )d (T ) − wKe(b−θH −αl )mSH − MS ≥ 0,
⎪
⎪
⎪ H
⎪
⎪ 0
⎪
⎪ bmS
⎨IR-L ( p − T ) Ke −d(T ) F (x )dx + ( p − T )d (T ) − wKe(b−θL −αl )mSL − MS ≥ 0,
L
L
0 (B.1)
⎪
⎪ bmS
Ke H −d (T ) KebmSL −d (T )
⎪
⎪IC-H ( p − T ) F (x )dx + ( p − T )d (T ) − wKe(b−θH −αl )mH − MHS ≥ ( p − T )
S
F (x )dx+
⎪
⎪
⎪
⎪ 0 0
⎪
⎪ ( p − T )d (T ) − wKe ( b−θH −αl )mSL
− ML ,
S
⎪
⎪
⎪
⎪ KebmSL −d (T ) KebmSH −d (T )
⎪
⎪IC-L ( p − T ) F (x )dx + ( p − T )d (T ) − wKe(b−θL −αl )mL − MLS ≥ ( p − T )
S
F (x )dx+
⎪
⎪
⎩ 0
( b−θL −αl )mSH
0
( p − T )d (T ) − wKe − MH .
S
Proceeding with the same process as previously discussed, because θ H < θ L , we can derive b − θH − αl > b − θL − αl , which further shows
that the constraints (IR-H) and (IC-L) imply constraint (IR-L); therefore, (IR-L) is redundant. Then, we retain constraint (IC-L) but omit (IC-
H) since only the low-credit LSP can receive a positive surplus by mimicking the high-credit LSP. Finally, the inequality constraints (IR-H)
bmS
S = ( p − T ) Ke H −d (T ) F (x )dx + ( p − T )d (T ) − wKe (b−θH −αl )mSH ,
and (IC-L) must both be binding at the optimal solution. Thus, we have MH 0
KebmSL −d (T )
F (x )dx + ( p − T )d (T ) − wKe(b−θH −αl )mH + wKe(b−θL −αl )mH − wKe(b−θL −αl )mL . Therefore, the supplier’s profit can be
S S S
MLS = ( p − T ) 0
reformulated as
Ke
bmS
H −d (T )

πsS = β ( p − T ) F (x )dx + ( p − T )d (T ) + wKe(b−θH −αs )mH − wKe(b−θH −αl )mH − cKebmH + (1 − β )
S S S
0
Ke
bmS
L −d (T )
(p − T ) F (x )dx + ( p − T )d (T ) + wKe(b−θL −αl )mH − wKe(b−θH −αl )mH + wKe(b−θL −αs )mL
S S S
×
0

(b−θL −αl )mSL bmSL
− wK e − cK e . (B.2)
Taking the second-order partial derivative of πsS with respect to (mSH , mSL ), we have
∂ 2 πsS
= β (( p − T )Kb2 ebmH (F (KebmH − d (T )) − KebmH f (KebmH − d (T ))) − wKe(b−θH )mH ((b − θH − αl )2 e−αl mH −
S S S S S S
S2
∂ mH
× (b − θH − αs )2 e−αs mH ) − b2 cKebmH ) + (1 − β )wKe(b−αl )mH ((b − θL − αl )2 e−θL mH − (b − θH − αl )2 e−θH mH ),
S S S S S
(B.3)
∂ 2 πsS
= (1 − β )(( p − T )Kb2 ebmL (F (KebmL − d (T )) − K ebmL f (K ebmL − d (T ))) − b2 cKebmL
S S S S S
∂ mSL 2
− wKe(b−θL )mL ((b − θL − αl )2 e−αl mL − (b − θL − αs )2 e−αs mL )),
S S S
(B.4)
∂ 2 πsS
= 0. (B.5)
∂ mSH ∂ mSL
Proceeding with the same process as described above, we have e−αl mH (b − θH − αl )2 − e−αs mH (b − θH − αs )2 > 0, (b − θL − αl )2 e−θL mH −
S S S
(b − θH − αl )2 e−θH mH < 0, (b − θL − αl )2 e−αl mL − (b − θL − αs )2 e−αs mL > 0.

S S S S S S
Additionally, F (Kebmi − d (T )) − K ebmi f (K ebmi − d (T )) <
bmS bmS
S S S S (Ke i −d (T )) f (Ke i −d (T )) S S
F (Kebmi − d (T )) − (Kebmi − d (T )) f (Kebmi − d (T )) = F (Kebmi − d (T ))(1 − ) = F (Kebmi − d (T ))(1 − H (Kebmi − d (T ))).
bmS
F (Ke i −d (T ))
S
We have H (Kebmi − d (T )) ≥ H (K − d (T )) since H(x) is increasing in x. At this time, even if the likeliest market demand reduces
to (K − d (T )), the LSP can realize the original potential sales quota K by benefiting from the incremental demand d(T). The prob-
ability density of (K − d (T )) should also be large enough to satisfy f (K − d (T )) ≥ 1/(K − d (T )), which is easy to satisfy with a
larger K. Thus, we have H (K − d (T )) = (K−d (T )) f (K−d (T )) > (K − d (T )) f (K − d (T )) ≥ 1, and 1 − H (Kebmi − d (T )) < 0. That is, we have
S
F (K−d (T ))
S S S ∂ 2 πsS ∂ 2 πsS
F (Kebmi − d (T )) − Kebmi f (Kebmi − d (T )) < 0. Then, we can derive that 2 < 0 and 2 < 0. Therefore, the Hessian matrix associated
∂ mSH ∂ mSL
∗ ∗
with πsS (mSH , mSL ) is negative definite. Hence, according to the first-order conditions, the optimal contract solutions mSH and mSL after
simplifying satisfy the following equations, respectively:
S∗ S∗ S∗
β b( p − T )F (KebmH − d (T )) + β (b − θH − αs )we−(θH +αs )mH + (1 − β )(b − θL − αl )we−(θL +αl )mH
S∗
− (b − θH − αl )we−(θH +αl )mH − β bc = 0, (B.6)
S∗ S∗ S∗
b( p − T )F (KebmL − d (T )) − (b − θL − αl )we−(θL +αl )mL + (b − θL − αs )we−(θL +αs )mL − bc = 0. (B.7)
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∗ ∗
Then, from the binding constraints (IR-H) and (IC-L), we can determine the optimal initial payment (MH S , MS ). From q (m ) = Kebmi , we
L i
∗ S∗
have (qH , qL ).
S
(2) Censoring strategy considering express cost

By increasing the initial payment MCi until the constraints become binding, the supplier can always improve the profit function. Thus,
KebmCi −d (T )
the inequalities constraint (IR-i) must be binding at the optimal solution, and we have MCi = ( p − T ) 0 F (x )dx + ( p − T )d (T ) −
wKe(b−θi −αl )mi . Substituting equations into the supplier’s profit function, the resulting supplier’s profit is
C

Ke
bmC
H −d (T )
(b−θH −αs )mCH (b−θH −αl )mCH
π = βλ ( p − T )
C
s F (x )dx + ( p − T )d (T ) + wKe − wKe − cKe bmCH
+ (1 − β )
0

Ke
bmC
H −d (T )
× (1 − λ ) ( p − T ) F (x )dx + ( p − T )d (T ) + wKe(b−θL −α ) − wKe(b−θH −α ) +β
C C
s mH l mH bmCH
− cKe
0

Ke
bmC
L −d (T )
(b−θH −αs )mCL (b−θL −αl )mCL
× (1 − λ ) ( p − T ) F (x )dx + ( p − T )d (T ) + wKe − wKe − cKe bmCL
+λ
0

Ke
bmC
L −d (T )
× (1 − β ) ( p − T ) F (x )dx + ( p − T )d (T ) + wKe(b−θL −α ) − wKe(b−θL −α )
C C
s mL l mL bmCL
− cKe − I. (B.8)
0
Taking the second-order partial derivative of πsC with respect to (mCH , mCL ), we have
∂ 2 πsC
= βλ ( p − T )Kb2 ebmH (F (KebmH − d (T )) − KebmH f (KebmH − d (T ))) − wKe(b−θH )mH ((b − θH − αl )2 e−αl mH
C C C C C C
C2
∂ mH

C
− (b − θH − αs )2 e−αs mH ) − b2 cKebmH + (1 − β )(1 − λ ) ( p − T )Kb2 ebmH (F (KebmH − d (T )) − KebmH
C C C C
C
× f (KebmH − d (T ))) + wK (b − θL − αs )2 e(b−θL −αs )mH − wK (b − θH − αl )2 e(b−θH −αl )mH − b2 cKebmH ,
C C C
(B.9)
∂ 2 πsC
= β (1 − λ ) ( p − T )Kb2 ebmL (F (KebmL − d (T )) − K ebmL f (K ebmL − d (T ))) − b2 cKebmL − wK (b − θL − αl )2
C C C C C
C2
∂ mL

C
× e(b−θL −αl )mL + wK (b − θH − αs )2 e(b−θH −αs )mL + (1 − β )λ ( p − T )Kb2 ebmL (F (KebmL − d (T )) − KebmL
C C C C
C
× f (KebmL − d (T ))) + wK (b − θL − αs )2 e(b−θL −αs )mL − wK (b − θL − αl )2 e(b−θL −αl )mL − b2 cKebmL ,
C C C
(B.10)
∂ 2 πsC
= 0. (B.11)
∂ mCH ∂ mCL
Proceeding with the same processes as presented above, we can derive that (b − θH − αl )2 e(b−θH −αl )mH > (b − θH − αs )2 e(b−θH −αs )mH ,
C C
(b − θH − αl )2 e(b−θH −αl )mH > (b − θL − αs )2 e(b−θL −αs )mH , (b − θL − αl )2 e(b−θL −αl )mL > (b − θL − αs )2 e(b−θL −αs )mL , (b − θL − αl )2 e(b−θL −αl )mL >
C C C C C
2 (b−θH −αs )mL

( b − θ H − αs ) e
C C
bmH
, F (Ke bmHC
− d (T )) − K e
C C C C
f (K ebmH − d (T )) < 0 and F (KebmL − d (T )) − K ebmL f (K ebmL − d (T )) < 0. Therefore, we
∂ 2 πsC ∂ 2 πsC
have 2 < 0, 2 < 0, and the Hessian matrix associated with πsC (mCH , mCL ) is negative definite. Hence, according to the first-order
∂ mCH ∂ mCL
∗
conditions, the optimal contract solutions mCi after simplifying satisfy the following equations, respectively:
C∗ C∗
(1 − β − λ + 2βλ )b( p − T )F (KebmH − d (T )) − (1 − β − λ + 2βλ )(b − θH − αl )we−(θH +αl )mH + βλ(b − θH − αs )
C∗ C∗
× we−(θH +α ) s mH
+ (1 − β − λ + βλ )(b − θL − αs )we−(θL +α ) s mH
− (1 − β − λ + 2βλ )bc = 0, (B.12)
C∗ C∗
(β + λ − 2βλ )b( p − T )F (KebmL − d (T )) − (β + λ − 2βλ )(b − θL − αl )we−(θL +αl )mL + β (1 − λ )(b − θH − αs )
C∗ C∗
× we−(θH +αs )mL + (1 − β )λ(b − θL − αs )we−(θL +αs )mL − (β + λ − 2βλ )bc = 0. (B.13)
∗ ∗ ∗ ∗
Then, from the binding constraint (IR-i), we can determine the optimal initial payment (MCH , MCL ). From q(mi ) = Kebmi , we have (qCH , qCL ).
(3) Factoring strategy considering express cost
Similarly, increasing the initial payment MH F and M F until the constraints become binding, the supplier can always improve the profit
L
KebmFi −d (T )
function. Thus, the inequalities constraint (IR-i) must be binding at the optimal solution, and we have MiF = ( p − T ) 0 F (x )dx +
( p − T )d (T ) − wKe(b−θi −αl )mi . Then, by substituting the binding constraints into the objective function, we can show that the resulting
F
supplier’s profit has an objective πsF as
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Ke
bmF
H −d (T )
πsF = β ( p − T ) F (x )dx + ( p − T )d (T ) + wKe(b−θH −αs )mH − wKe(b−θH −αl )mH − cKebmH
F F F
0
Ke
bmF
L −d (T )
(b−αs )mFH
+ (1 − β ) ( p − T ) F (x )dx + ( p − T )d (T ) + wKe(b−θL −αs )mL
F
− r f wKe
0

− wK e(b−θL −αl )mL − cK ebmL − r f wK e(b−αs )mL .
F F F
(B.14)
Taking the second-order partial derivative of πsF with respect to (mFH , mFL ), we have
∂ 2 πsF
= β (( p − T )Kb2 ebmH (F (KebmH − d (T )) − KebmH f (KebmH − d (T ))) − (b − αs )2 r f wKe(b−αs )mH
F F F F F
2
∂ mHF
− wKe(b−θH )mH ((b − θH − αl )2 e−αl mH − (b − θH − αs )2 e−αs mH ) − b2 cKebmH ),

F F F F
(B.15)
∂ 2 πsF
= (1 − β )(( p − T )Kb2 ebmL (F (KebmL − d (T )) − K ebmL f (K ebmL − d (T ))) − (b − αs )2 r f wKe(b−αs )mL
F F F F F
2
∂ mL F
− wKe(b−θL )mL ((b − θL − αl )2 e−αl mL − (b − θL − αs )2 e−αs mL ) − b2 cKebmL ),

F F F F
(B.16)
)2 e(b−θH −αl )mH )2 e(b−θH −αs )mH ,

F F
Proceeding with the same processes as discussed above, we can derive (b − θH − αl > ( b − θ H − αs ( b − θL −
αl )2 e(b−θL −αl )mL > (b − θL − αs )2 e(b−θL −αs )mL , F (KebmH − d (T )) − KebmH f (KebmH − d (T )) < 0 and F (KebmL − d (T )) − KebmL f (KebmL − d (T )) <
F F F F F F F F
∂ 2 πsF ∂ 2 πsF
0. Therefore, we have < 0, < 0, and the Hessian matrix associated with πsF (mFH , mFL ) is negative definite. According to the
F2 F2 ∂ mH ∂ mL
∗ ∗
first-order conditions, the optimal contract solutions mFH and mFL after simplifying satisfy the following equations, respectively:
F∗ F∗ F∗ F∗
b( p − T )F (KebmH − d (T )) − (b − θH − αl )we−(θH +αl )mH + (b − θH − αs )we−(θH +αs )mH − bc − (b − αs )r f we−αs mH = 0, (B.17)
F∗ F∗ F∗ F∗
b( p − T )F (KebmL − d (T )) − (b − θL − αl )we−(θL +αl )mL + (b − θL − αs )we−(θL +αs )mL − bc − (b − αs )r f we−αs mL = 0. (B.18)
∗ ∗ ∗ ∗
Then, from the binding constraint (IR-i), we can determine the optimal initial payment (MHF , MLF ). From q(mi ) = Kebmi , we have (qFH , qFL ).
Proof of corollary 10. (1) In screening strategy, the optimal credit period for the high-credit level LSP satisfies β b( p −
S∗ S∗ S∗ S∗
T )F (KebmH − d (T )) + β (b − θH − αs )we−(θH +αs )mH + (1 − β )(b − θL − αl )we−(θL +αl )mH − (b − θH − αl )we−(θH +αl )mH − β bc = 0. Multi-
∗ S∗
bmSH
plying two sides of the equation by e and taking the derivative of equations with respect to T, we have β b2 ( p − T )F (KebmH −
∗ S∗ S∗ S∗ S∗ S∗ ∗ S∗
bmSH ∂ mH
(b−θH )mSH bmSH ∂ mH
d (T ))e ∂T − β bebmH F (KebmH − d (T )) − β b( p − T ) f (KebmH − d (T ))ebmH (Kbe
∂ T − d (T )) − β (we ((b − θH −
∗ S∗
−αl mSH −αs mSH bmSH (b−αl )mSH ∂ mSH
−θL mSH −θH mSH ∂ mH
αl ) e
2 − ( b − θ H − αs ) e
2 ) − b ce ) ∂ T + (1 − β )we
2 ((b − θL − αl ) e
2 − ( b − θ H − αl ) e
2 ) ∂ T = 0. Denote
A = β (( p − T )b2 ebmH (F (KebmH − d (T )) − KebmH f (KebmH − d (T ))) − we(b−θH )mH ((b − θ − α )2 e−αl mH − (b − θ − α )2 e−αs mH ) − b2 cebmH ) +
S S S S S S S S
H l H s
S∗ S∗ S∗ S∗
(1 − β )we(b−αl )mH ((b − θL − αl )2 e−θL mH − (b − θH − αl )2 e−θH mH ), B = β b( p − T ) f (KebmH − d (T ))ebmH d
(T ) − β bebmH F (KebmH − d (T )).
S S S
∗ S∗ ∗
∂ mSH ∂ 2 πsS
bm
F (Ke H −d (T )) ∂ mS
∂ T = −A . From ∂ mS 2 < 0 we know that −A > 0. When d (T ) ≥
B
Thus, ∗ , B ≥ 0, we can derive ∂ TH ≥ 0. Otherwise,
bmS
H ( p−T ) f (Ke H −d (T ))
∗
∂ mSH S∗ S∗
∂T < 0. (2) The optimal credit period for the low-credit level LSP satisfies b( p − T )F (KebmL − d (T )) − (b − θ − α )we−(θL +αl )mL + L l
S∗ S∗
(b − θL − αs )we−(θL +αs )mL − bc = 0. Similarly, multiplying two sides of the equation by ebmL and taking the derivative of equations
∗ ∗
∂ mSL bmSL
∗ S∗
S∗ S∗
S∗ S∗ S ∗ ∂ mS
with respect to T, we have b2 ( p − T )F (KebmL − d (T ))ebmL ∂ T −∗ be F (KebmL − d (T )) − b( p − T ) f (KebmL − d (T ))ebmL (KbebmL ∂ TL −
∗
S ∂ mS S ∂ mS S∗ S∗
d
(T )) − we(b−θL )mL ((b − θL − αl )2 e−αl mL − (b − θL − αs )2 e−αs mL ) ∂ TL − b2 cebmL ∂ TL = 0. C = b( p − T ) f (KebmL − d (T ))ebmL d
(T ) −
S S
Let
∗ ∗
D = ( p − T )b2 ebmL (F (KebmL − d (T )) − KebmL f (KebmL − d (T ))) − we(b−θL )mL ((b − θ − α )2 e−αl mL − (b − θ −
S S S S S S S S
bebmL F (KebmL − d (T )), L l L
∗ S∗
∂ mSL ∂ 2 πsS bm
αs )2 e−αs mL ) − b2 cebmL . Thus,
F (Ke L −d (T ))
S S
∂ T = −D . From ∂ mS 2 < 0 we know that −D > 0. When d (T ) ≥
C
∗ , C ≥ 0, we can de-
bmS
L ( p−T ) f (Ke L −d (T ))
∗ ∗
∂ mS ∂ mS
rive ∂ TL ≥ 0. Otherwise, ∂ TL < 0. (3) For the censoring and factoring strategy, we can get the same conclusions as discussed above. The
proof process is similar to the proof mentioned previously and is thus omitted. We collect our conclusions as shown in Corollary 10.
JID: OME
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Strategic Credit Sales To Express Retail Under Asymmetric Default Risk and Stochastic Market Demand

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Strategic credit sales to express retail under asymmetric default risk

1. Introduction by express companies in China, representing over 40% of the world

2 K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx

K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx 3

4 K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx

K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx 5

6 K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx

K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx 7

8 K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx

Corollary 7 shows that as the production cost c increases, the

K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx 9

10 K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx

K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx 11

12 K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx

K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx 13

The supplier’s problem, therefore, can be reformulated as follows:

F (x )dx − wKe(b−θH −αl )mH − MHS .

F (x )dx − wKe(b−θH −αl )mH ,

Therefore, the supplier’s proﬁt can be reformulated as

πsS = β p F (x )dx + wKe(b−θH −α ) − wKe(b−θH −α ) + (1 − β )

14 K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx

F (x )dx − wKe(b−θi −αl )mi .

πsC = βλ p F (x )dx + wKe(b−θH −α ) − wKe(b−θH −α ) + (1 − β )

× (1 − β ) p F (x )dx + wKe(b−θL −α ) − wKe(b−θL −α )

K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx 15

(b−θH −αl )mCH (b−θL −αs )mCH

F (x )dx − wKe(b−θi −αl )mi .

πsF = β p F (x )dx + wKe(b−θH −αs )mH − wKe(b−θH −αl )mH − cKebmH

16 K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx

K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx 17

18 K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx

K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx 19

(1) Screening strategy considering express cost

20 K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx

The supplier’s problem, therefore, can be reformulated as follows:

(b − θH − αl )2 e−θH mH < 0, (b − θL − αl )2 e−αl mL − (b − θL − αs )2 e−αs mL > 0.

K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx 21

(2) Censoring strategy considering express cost

2 (b−θH −αs )mL

supplier’s proﬁt has an objective πsF as

22 K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx

− wKe(b−θH )mH ((b − θH − αl )2 e−αl mH − (b − θH − αs )2 e−αs mH ) − b2 cKebmH ),

− wKe(b−θL )mL ((b − θL − αl )2 e−αl mL − (b − θL − αs )2 e−αs mL ) − b2 cKebmL ),

)2 e(b−θH −αl )mH )2 e(b−θH −αs )mH ,

K. Wang, P. Ding and R. Zhao / Omega xxx (xxxx) xxx 23

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