Financing Small and Medium-Size Enterprises via Retail Platforms

Problem Definition: This paper studies the multifaceted impact of loan programs initiated by a retail platform to its sellers on these sellers' operational and financing decisions, profits of the sellers and the platform, as well as consumer welfare.Academic/Practical Relevance:Many small and medium-sized enterprises (SMEs) on retail platforms face capital constraints that limit their ability to meet market demand. Due to lack of sufficient asset and credit history, SMEs also face the challenge of securing loans from traditional banks. Therefore, the financial loan decisions of a retail platform to its SMEs have become an essential part of the platform design.Methodology: We develop a two-stage game-theoretic model where multiple SMEs who face financial constraints compete on a retail platform, and the platform decides how to offer financial loans to its SMEs.Results: We show that platform loan programs can greatly affect the platform's competitive landscape. Offering generous loans to competing sellers can make sellers worse-off in the equilibrium where they are willing to accept the loans -- a prisoner's dilemma. The platform can, by strategically choosing parameters of loan program (e.g., loan credit line, loan program coverage, or target required rate of return), reduce the intensity of the prisoner's dilemma for sellers in high or moderate need of funds, but can not fully eliminate the prisoner's dilemma.Managerial Implications: The research findings provide useful insights for retail platforms on how to offer financial loans to sellers based on understanding the potential incentive misalignment between the platform and its sellers. From a government perspective, our research also sheds light on the impact of a platform's loan decisions on consumer welfare and how such decisions should be regulated.