Coordination of supply chains by option contracts: A cooperative game theory approach

Yingxue Zhao, Shouyang Wang, T.C.E. Cheng, Xiaoqi Yang and Zhimin Huang

European Journal of Operational Research, 2010, vol. 207, issue 2, 668-675

Abstract: Manufacturer-retailer supply chains commonly adopt a wholesale price mechanism. This mechanism, however, has often led manufacturers and retailers to situations of conflicts of interest. For example, due to uncertain market demand, retailers prefer to order flexibly from manufacturers so as to avoid incurring inventory costs and to be able to respond flexibly to market changes. Manufacturers, on the other hand, prefer retailers to place full orders as early as possible so that they can hedge against the risks of over- and under-production. Such conflicts between retailers and manufacturers can result in an inefficient supply chain. Motivated by this problem, we take a cooperative game approach in this paper to consider the coordination issue in a manufacturer-retailer supply chain using option contracts. Using the wholesale price mechanism as a benchmark, we develop an option contract model. Our study demonstrates that, compared with the benchmark based on the wholesale price mechanism, option contracts can coordinate the supply chain and achieve Pareto-improvement. We also discuss scenarios in which option contracts are selected according to individual supply chain members' risk preferences and negotiating powers.

Keywords: Supply; chain; management; Cooperative; game; Option; contract; Negotiating; power; Channel; coordination (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (52)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:207:y:2010:i:2:p:668-675

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