The role of government regulatory policies in financing capital-constrained retailers under competition

Governments in many different countries have implemented regulatory policies (such as tax reduction and subsidy provision) to support the development and operation of capital-constrained small and medium-sized enterprises (SMEs) that may compete each other in practice. To better understand the impacts of government regulatory policies on capital-constrained SMEs, bank, consumers and social welfare, this paper develops a Cournot competition model consisting of two competing and capital-constrained retailers in a market with demand uncertainty. We obtain the optimal procurement decisions of two retailers and the optimal loan interest decision of the bank completely, and compare the effects of two government supporting policies (i.e., tax reduction and subsidy provision) in a Nash game of the two retailers. We show that the difference of the two retailers’ procurement costs closely affects the procurement decision of the retailer who possesses the cost advantage, and that this retailer orders more under government regulatory policies than without government regulation, if the procurement costs of two retailers are relatively balanced. In addition, tax reduction can improve the profits of the retailers engaged in the competitive market when the gap of their procurement costs is small relatively, whereas the subsidy provision can always improve the profit of the retailer who does not possess a procurement cost advantage. The bank is incentivized to lower its interest rate to both retailers under tax reduction; under the subsidy provision, the opposite result is true. Our finding can demonstrate that there exists a win–win–win situation for the two retailers, the consumers as well as for the society in the case of bank financing with government tax reduction/subsidy provision. The numerical studies show that the improvement of social welfare is more significant in the case of subsidy provision than that in the case of tax reduction.