Effect of two-echelon trade credit on pricing-inventory policy of non-instantaneous deteriorating products with probabilistic demand and deterioration functions

Usually, the profit of companies will increase if they employ trade credit financing policy to encourage customer to purchase more. This paper develops a model for pricing and inventory control of non-instantaneous deteriorating items under two-echelon trade credit in which the vendor provides a credit period to the retailer and the retailer in turn offers a delay in payment to his/her customer. The price-dependent probabilistic demand function and partially backlogged shortages are adopted. Also, deterioration is shown by three different probability distribution function including (1) uniform distribution, (2) triangular distribution, and (3) beta distribution. The theoretical results are designed to determine the optimal selling price and the optimal inventory control variables so that the retailer’s total profit is maximized. Also, the necessary and sufficient conditions to prove the existence and uniqueness of the optimal solution are provided. Moreover, an algorithm is extended to describe the solution procedure. Numerical example, sensitivity analysis, and a simulation approach are presented to illustrate the performance of the algorithm and the theoretical results. Several managerial insights are also driven from computational results. The results indicate that the retailer’s total profit increases by considering the non-instantaneous deteriorating phenomenon and the trade credit policy.