An Option Contract with Optimized Prices in Supply Chain

: This research considers a supply contract in a two-stage supply chain consisting of one supplier and one buyer. Market demands are stochastic, and there are two opportunities for the buyer to do demand forecast. The buyer places a (cid:12)rm order to the supplier with the (cid:12)rst forecast at the beginning of production. At the same time, the buyer purchases a quantity of options. With the second forecast at the beginning of sales season, the buyer determines the execution quantity of the option. The supplier decides the option price, option execution price and wholesale price, while the buyer decides initial order quantity, option quantity and option execution quantity optimally under given prices. In this paper, we take a game theoretic approach to consider the coordination issue between the supplier and the buyer. We focus on the wholesale price that may increase supplier’s pro(cid:12)t; however, it depends on buyer’s response to the supplier’s decision on the wholesale price.