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Mixed contracts for the newsvendor problem with real options

Author

Listed:
  • Jörnsten, Kurt

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Nonås, Sigrid Lise

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Sandal, Leif K.

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Ubøe, Jan

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

In this paper we consider the newsvendor model with real options. We consider a mixed contract where the retailer can order a combination of q units subject to the conditions in a classical newsvendor contract and Q real options on the same items. We provide a closed form solution to this mixed contract when the demand is discrete and study some of its properties. We also offer an explicit solution for the continuous case. In particular we demonstrate that a mixed contract may be superior to a real option contract when a manufacturer has a bound on how much variance she is willing to accept.

Suggested Citation

  • Jörnsten, Kurt & Nonås, Sigrid Lise & Sandal, Leif K. & Ubøe, Jan, 2011. "Mixed contracts for the newsvendor problem with real options," Discussion Papers 2011/6, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2011_006
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    File URL: http://hdl.handle.net/11250/164136
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    References listed on IDEAS

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    1. Dawn Barnes-Schuster & Yehuda Bassok & Ravi Anupindi, 2002. "Coordination and Flexibility in Supply Contracts with Options," Manufacturing & Service Operations Management, INFORMS, vol. 4(3), pages 171-207, May.
    2. Victor Martínez-de-Albéniz & David Simchi-Levi, 2009. "Competition in the Supply Option Market," Operations Research, INFORMS, vol. 57(5), pages 1082-1097, October.
    3. Seifert, Ralf W. & Thonemann, Ulrich W. & Hausman, Warren H., 2004. "Optimal procurement strategies for online spot markets," European Journal of Operational Research, Elsevier, vol. 152(3), pages 781-799, February.
    4. M S Sodhi & S Lee, 2007. "An analysis of sources of risk in the consumer electronics industry," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 58(11), pages 1430-1439, November.
    5. Li, Shanling & Murat, Alper & Huang, Wanzhen, 2009. "Selection of contract suppliers under price and demand uncertainty in a dynamic market," European Journal of Operational Research, Elsevier, vol. 198(3), pages 830-847, November.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Irfanullah Khan & Biswajit Sarkar, 2021. "Transfer of Risk in Supply Chain Management with Joint Pricing and Inventory Decision Considering Shortages," Mathematics, MDPI, vol. 9(6), pages 1-20, March.

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    More about this item

    Keywords

    Newsvendor model; real options; discrete demand; mixed contract;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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