In this seminar, we will examine how consumer liquidity—a critical market friction—affects a retailer’s pricing and inventory management decisions. Motivated by the rapid adoption of Buy Now, Pay Later (BNPL) contracts, we examine how consumer liquidity affects a retailer’s pricing and inventory management decisions. By analyzing a setting that involves a retailer, consumers, and a FinTech firm, we characterize the long-term impacts of BNPL contracts on the retailer’s profit, product’s price, product’s availability, and consumer surplus. Finally, we will analyze a key insight that retailers which accept BNPL financing always raise the equilibrium price, and discuss why this financing may not prove profitable for all retail products and markets.
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