Abstract：This research studies a three-stage supply chain wherein manufacturers provide trade credit to distributors and distributors provide trade credit to retailers. Based on the modified newsvendor model incorporating the factors of default risk and the time value of money, the optimal lot sizes are derived from the perspectives of retailers, distributors and manufacturers respectively. Then we analyze the impacts of the default probability and credit period on these lot sizes and discuss the coordination effectiveness of quantity discount contract under trade credit. The results show that the upstream deliveries may be less than the downstream order quantity due to the default risk, which causes a barrel effect or even a reversed bullwhip effect in the supply chain. The lot size of each firm negatively correlates with its own credit period while positively correlates with others’ credit period. A rational quantity discount contract should take comprehensive consideration of the impacts of expected profit, credit period, and default probability, whilst the effectiveness of such contract depends on whether the event of cutting order occurs.
