Credit grace periods for one-time-only sales

Abstract

Periods of sluggish demand and/or poorsales forecasts often leads to build-ups of unwanted inventories. When this happens, fundsare tied up unnecessarily in unproductive endeavours and expected sales revenues are not realized. To counter such occurrences, vendors often retort to payment reduction schemes designed to encourage sales. The most common is a temporary purchase price reduction until inventories reach more acceptable levels. A lesser known but also quite popular strategy is to give the buyer a grace period within which the buyer is not required to pay for the merchandise already purchased. The evaluation of such strategy, from the buyer’s perspective, is the purpose of this paper.