Lending to Third-party Sellers with Platform Loan

The large e-commerce platforms now not only provide a venue for the third-party sellers to sell their products but also provide financing services for them. In this paper, we study the impacts of such platform financing on the profits of a supply chain and the platform, as compared to the conventional supply chain financing where the supplier offers the seller trade credit. We develop a classical two-stage supply chain model, in which the end demand follows a downward sloping function and the market size is random. We identify the interest subsidizing role, the risk mitigation role and the risk isolation role that can empower platform financing to be a win-win strategy for the supply chain and the platform. Although platform financing has a cost markup disadvantage as compared to trade credit, it also has a revenue recover advantage. We find that as the cost markup disadvantage weakens, platform financing can first benefit the three parties for moderate market uncertainty by playing the risk mitigation role, then for low market uncertainty by playing the interest subsidizing role, and lastly for high market uncertainty by playing the risk isolation role. Moreover, if the platform can endogenize the interest rate, it may set the rate strictly below the risk-free interest rate for low and moderate market uncertainty to enable the interest subsidizing role and the risk mitigation role and strictly benefit all parties. Although it may set the rate above the risk-free interest rate for high market uncertainty, the risk isolation role can still make the three parties strictly better off than under trade credit. These insights are useful for understanding the performance and the design of platform financing.