The supply chain effects on order strategy of cross-shareholdings

This study examines the joint impact of the vertical cross-shareholdings and external financing, including trade credit and bank loans, on the order strategy of a capital-constrained retailer. We set the target retailer and his supplier, which are connected with vertical cross-shareholdings, in the extended Cournot and Stackelberg game. The capital-constrained retailer could raise external financing when he has exhausted his own cash. Besides, the retailer may be faced with the random shock result from the other business. We use optimal response function to model how the capital-constrained retailer determines his order quantity under cross-shareholdings in response to different market conditions (such as his own cash level and other competitor’s order strategy). We find that, the retailer orders more under cross-shareholdings if the retailer is well-funded with his own cash or external financing, resulting in a win-win situation for the supplier and retailer. However, if the retailer has run out of all his cash and credit, the cross-shareholdings have no effect on the retailer’s order strategy. Thus, it helps the capital-constrained retailer to acquire competitive advantage that he could be well-funded with external financing under cross-shareholdings.