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A note generalizing “an option mechanism to coordinate a dyadic supply chain bilaterally in a multi-period setting”

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  • Berling, Peter

Abstract

The problem investigated in this paper is the one of finding the optimal combination of inventory and options in a stationary multi-period problem with an infinite horizon. The research complements existing literature as it considers the combination of option and wholesale contracts. The paper show how the problem can be transformed to a combination of newsvendor type problems. This alternative interpretation allows us to derive the necessary conditions for the pricing of an option contract that maximizes the system wide profit as well as the conditions for when the different parties will be able to design such a price scheme. It turns out that the possibility to do so depends on where it is optimal to keep inventory and how much inventory is kept under the pure wholesale contract. Moreover is it shown that the supply chain optimal solution cannot be guaranteed even if a Central planner prices the option contract.

Suggested Citation

  • Berling, Peter, 2021. "A note generalizing “an option mechanism to coordinate a dyadic supply chain bilaterally in a multi-period setting”," Omega, Elsevier, vol. 101(C).
    • Handle: RePEc:eee:jomega:v:101:y:2021:i:c:s0305048318313604
    DOI: 10.1016/j.omega.2020.102257
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    References listed on IDEAS

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    1. Berling, Peter & Eng-Larsson, Fredrik, 2017. "Environmental implications of transport contract choice - capacity investment and pricing under volume and capacity contracts," European Journal of Operational Research, Elsevier, vol. 261(1), pages 129-142.
    2. Chung-Yee Lee & Xi Li & Yapeng Xie, 2013. "Procurement risk management using capacitated option contracts with fixed ordering costs," IISE Transactions, Taylor & Francis Journals, vol. 45(8), pages 845-864.
    3. Berling, Peter, 2008. "Real options valuation principle in the multi-period base-stock problem," Omega, Elsevier, vol. 36(6), pages 1086-1095, December.
    4. Qi Fu & Chung-Yee Lee & Chung-Piaw Teo, 2010. "Procurement management using option contracts: random spot price and the portfolio effect," IISE Transactions, Taylor & Francis Journals, vol. 42(11), pages 793-811.
    5. Nana Wan & Xu Chen, 2016. "Multiperiodic Procurement Problem with Option Contracts under Inflation," Mathematical Problems in Engineering, Hindawi, vol. 2016, pages 1-11, March.
    6. D. J. Wu & Paul R. Kleindorfer, 2005. "Competitive Options, Supply Contracting, and Electronic Markets," Management Science, INFORMS, vol. 51(3), pages 452-466, March.
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