A Stackelberg Game Model with Supply Chain Option Contracts under Random Yield and Stochastic Demand

Abstract

Abstract. Consider a supply chain consisting of a retailer and a supplier, and the yield of the supplier is random while the market demand of the retailer is stochastic. Due to the double marginalization, the wholesale price contract can't achieve the coordination of the supply chain, we introduce option contracts into the supply chain in order to investigate whether option contracts can improve the supply chain's performance under the circumstance where the yield and demand are all uncertain. Through establishing the dynamic Stackelberg game model, which is dominant by the retailer, we discuss the optimal production strategy of the supplier and the optimal purchasing strategy of the retailer, find that the relationship between the production input and the option order quantity is non-linear. In addition, sensitivity analysis indicate that the correlations of decision variables with several parameters. Researches show that option contracts not only offering flexibility for retailer's purchasing, it can also achieve supply chain coordination under some certain conditions.