Channel Coordination of a Dominant-Retailer Supply Chain Model with Option Contract

Abstract

Option contract with two parameters is studied in a supply chain with a supplier and a retailer. The coordination mechanisms under symmetric information and asymmetric information are investigated respectively. With the symmetric information, the leader retailer can get the channel coordination by setting appropriate contract parameters. Under asymmetric information, we analyze how the supply chain operates with option contract under a uniformly distribution demand. The coordination mechanism with a continuum of the cost type is investigated. The results indicates that optimal supply chain performance requires the retailer to offer a mechanism of option pricing, a function of the declared cost of the supplier, which makes supplier maximize his profit only by reporting his true cost.