Optimal Promotion Strategies for Deteriorating Products: Price Discount Versus Credit Period Extension

Abstract

Product deterioration poses significant challenges to inventory management and profitability. Highlighting the importance of effective promotion strategies, this paper investigates two countermeasures for deteriorating goods: price promotion (price discount) and trade credit promotion (credit period extension), analyzing their differential impacts on mitigating value loss. While both strategies alleviate deterioration effects, their cost structures diverge: price promotion directly erodes marginal profit, whereas trade credit promotion incurs cash opportunity cost from deferred payments. Our findings reveal that both price and trade credit promotions can help mitigate the impact of deterioration and enhance the retailer's profitability with different scopes of application. Specifically, trade credit promotion results in higher retailer profitability when the unit cash opportunity cost falls below a certain threshold; otherwise, price promotion becomes the more favorable strategy. This threshold inversely correlates with the selling price and positively relates to the sensitivity of market demand to the credit period. Furthermore, we find that the more profitable strategy– - whether price promotion or trade credit promotion—not only enhances the retailer's profitability but also improves consumer surplus, thereby creating a win-win outcome. An extended model accounting for consumer indifference to product deterioration reaffirms the distinct impacts of both promotion strategies while validating the robustness of the baseline model. This paper offers managerial insights into how retailers choose and implement promotion strategies when selling deteriorating products.