Pricing supply chain option contracts: a bilevel programming approach
Journal of Modelling in Management
ISSN: 1746-5664
Article publication date: 27 June 2020
Issue publication date: 13 November 2020
Abstract
Purpose
This paper considers an option contract in a two-stage supplier-retailer supply chain (SC) when market demand is stochastic. The problem is a Stackelberg game with the supplier as a leader. This research assumes demand information sharing. The purpose of this study is to determine the optimal pricing strategy of the supplier along with the optimal order strategy of the retailer in three option contract cases.
Design/methodology/approach
The paper model the option contract pricing problem as a bilevel problem. The problem is then solved using bilevel programing methods. After computing, the generated outcomes are compared to a benchmark (wholesale price contract) to evaluate the contract.
Findings
The results reveal that only one of the contract cases can arbitrarily allocate the SC profit. In both other cases, the Stackelberg supplier manages to earn the total SC profit. Further analysis of the first contract, show that from the supplier’s perspective, the first stage forecast inaccuracy is beneficial, whereas the demand uncertainty in the second stage is detrimental. This contracting strategy guarantees both players better outcomes compared to the wholesale price contract.
Originality/value
To the best of the authors’ knowledge, this research is the first that links the option contract literature to the bilevel programing literature. It also the first to solve the pricing problem of the commitment option contract with demand update where the retailer exercises the option before knowing the exact demand.
Keywords
Citation
Trabelsi, A. and Matsukawa, H. (2020), "Pricing supply chain option contracts: a bilevel programming approach", Journal of Modelling in Management, Vol. 15 No. 4, pp. 1567-1589. https://doi.org/10.1108/JM2-08-2019-0195
Publisher
:Emerald Publishing Limited
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