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

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.