Bilateral Coordination Strategy of Supply Chain with Bidirectional Option Contracts under Inflation

Abstract

As far as the price increase and the demand contraction caused by inflation are concerned, we establish a Stackelberg game model that incorporates bidirectional option contracts and the effect of inflation and derive the optimal ordering and production policies on a one-period two-stage supply chain composed of one supplier and one retailer. Through using the model of wholesale price contracts as the benchmark, we find that the introduction of bidirectional option contracts can benefit both the supplier and the retailer under inflation scenarios. Based on the conclusions drawn above, we design the bilateral coordination mechanism from the different perspective of two members involved and discuss how bidirectional option contracts should be set to achieve channel coordination under inflation scenarios. Through the sensitivity analysis, we illustrate the effect of inflation on the optimal decision variables and the optimal expected profits of the two parties with bidirectional option contracts.

Contracts choice for supply chain under inflation

“…The papers by Wan and Chen (2015a, 2015b, 2015c) are closest to our work. In these papers, they separately incorporate the effect of inflation and one certain type of option contracts into a modeling structure.…”

“…In this section, we review three related papers written by Wan and Chen (2015a, 2015b, 2015c). In each article, one certain type of portfolio contracts are considered consisting of wholesale price contracts and one certain type of option contracts.…”

“…Considering the rising retail price and the shrinking market demand caused by inflation, Wan and Chen (2015c) derive the optimal ordering and production policies under two different contracts: wholesale price contracts and portfolio contracts with bidirectional options. Through the comparative analysis, they demonstrate that the retailer prefers adopting portfolio contracts with bidirectional options under inflation and the supplier is also inclined to provide portfolio contracts with bidirectional options under inflation.…”

“…However, most of the published papers only consider the demand uncertainty and neglect the risks of demand and price caused by inflation. Given such conditions, Wan and Chen (2015a, 2015b, 2015c) incorporate the effect of inflation and option games into a modeling framework, and investigate the role of option contracts on the supply chain decisions and performance under inflation. They prove that the utilization of option contracts is beneficial for the members to improve their economic efficiency and for the channel to achieve the coordination under inflation.…”

“…To answer the above questions, we limit ourselves to the same problem setting as Wan and Chen (2015a, 2015b, 2015c). To some extent, our work can be considered as an extension of the above papers.…”