Optimal ordering policy for a price-setting newsvendor with option contracts under demand uncertainty

Wang, Chong; Chen, Xu

doi:10.1080/00207543.2015.1053577

Cited by 52 publications

(35 citation statements)

References 33 publications

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“…Option contracts are widely used in practice for outsource planning, especially in the case of innovative products like electronics (Wang and Tsao, ; Wang and Chen, ). Option contracts usually include two stages.…”

Section: Introductionmentioning

confidence: 99%

Outsource planning with asymmetric supply cost information through a menu of option contracts

Nosoohi

Nookabadi

2017

Int Trans Operational Res

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This paper investigates a supply contract design by a dominant manufacturer who faces a stochastic demand during a selling season. The manufacturer has several estimations of the supplier's cost with corresponding probabilities, that is, asymmetric cost information. The manufacturer designs a menu of call option contracts that include three variables: a supply order, an option, and an exercise price. We determine the optimal negative correlation between option and exercise prices as well as closed-form formulas for the optimal supply orders. The results show that in the optimal menu of contracts either the option or the exercise price may be omitted from the menu, whereas the supply orders should always be customized for each supplier type. We show that in this problem, optimal profit assignment between contract partners under put and bidirectional option contracts is the same as call option contract studied. Numerical analysis including managerial insights is presented.

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Section: Introductionmentioning

confidence: 99%

Outsource planning with asymmetric supply cost information through a menu of option contracts

Nosoohi

Nookabadi

2017

Int Trans Operational Res

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“…Based on these basic models, integrated decisions on ordering and pricing are investigated under different settings Discrete Dynamics in Nature and Society 3 and perspectives, such as product return [2,28], supply uncertainty [29], service level constraint [30,31], multiple price markdowns [32], supply chain contracts [33,34], dual sourcing channel [35,36], and multiperiod planning [3,37,38]. Other creative works include the research on joint ordering and pricing decisions considering repeat-purchase based on the Bass model [39], retailer's ordering and pricing decisions of responding to the supplier's temporary price discounts [40], ordering and pricing model considering transshipment between two independent retailers [41], and retailer's joint ordering, pricing and advertising decisions [42].…”

Section: Integrated Decisions On Operations and Marketingmentioning

confidence: 99%

“…The retailer purchases single seasonal products from the manufacturer before the selling season and then sells them to the customers. The market demand is randomly price-dependent and is formulated as the following linear form: ( , ) = − + , where ∈ [− , ] is a random term with a uniform distribution whose PDF and CDF are ( ) and ( ), respectively, and , , and are all positive [2,13,34]. (Normally, ∈ [ , ] is adopted in related literature.…”

Section: Problem Description and Assumptionsmentioning

confidence: 99%

Optimal Ordering and Pricing Policies for Seasonal Products: Impacts of Demand Uncertainty and Capital Constraint

Shi

Fung

Guo

2016

Discrete Dynamics in Nature and Society

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With a stochastic price-dependent market demand, this paper investigates how demand uncertainty and capital constraint affect retailer's integrated ordering and pricing policies towards seasonal products. The retailer with capital constraint is normalized to be with zero capital endowment while it can be financed by an external bank. The problems are studied under a low and high demand uncertainty scenario, respectively. Results show that when demand uncertainty level is relatively low, the retailer faced with demand uncertainty always sets a lower price than the riskless one, while its order quantity may be smaller or larger than the riskless retailer's which depends on the level of market size. When adding a capital constraint, the retailer will strictly prefer a higher price but smaller quantity policy. However, in a high demand uncertainty scenario, the impacts are more intricate. The retailer faced with demand uncertainty will always order a larger quantity than the riskless one if demand uncertainty level is high enough (above a critical value), while the capital-constrained retailer is likely to set a lower price than the well-funded one when demand uncertainty level falls within a specific interval. Therefore, it can be further concluded that the impact of capital constraint on the retailer's pricing decision can be influenced by different demand uncertainty levels. Hindawi Publishing CorporationDiscrete Dynamics in Nature and Society decisions on ordering, pricing, and financing, which is not observed in existing literature. The main contributions and conclusions of this paper are as follows.(1) Studying Retailer's Integrated Decisions on Ordering, Pricing, and Financing. With introducing pricing decision into the "capital-constrained newsvendor" problem, this paper investigates the retailer's integrated ordering and pricing decisions in the presence of capital constraint. Results show that when market size is extremely small, the retailer will not borrow from the bank to order any quantity. Otherwise, it will borrow to order and its optimal order quantity and selling price can be uniquely determined.(2) Investigating the Impacts of Demand Uncertainty and Capital Constraint on Retailer's Optimal Ordering and Pricing Policies. Three models (i.e., the riskless model, uncertainty model, and uncertainty-underfunded model) are developed and in-depth comparisons of optimal solutions in three models are carried out to reveal how demand uncertainty and capital constraint affect retailer's integrated ordering and pricing policies. The problems are studied in a low and high demand uncertainty scenario, respectively, which is differentiated by an ingenious method, and plenty of conclusions are obtained through both theoretical analyses and numerical studies.The remainder of the paper is organized as follows. Section 2 presents the review of related literature. Section 3 describes the problem and provides the model notations and assumptions. Section 4 formulates three models and derives the optimal solutions. Sectio...

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“…() discuss the channel coordination problem with a loss‐averse retailer and a risk‐neutral supplier under call option contracts. Wang and Chen () discuss the joint ordering and pricing problem of a newsvendor in the presence of call option contracts. All these papers only consider the stochastic demand condition and never consider the inflationary condition.…”

Section: Literature Reviewmentioning

confidence: 99%

Contracts choice for supply chain under inflation

Wan

Chen

2016

Int Trans Operational Res

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Inflation causes an increase in the retail price and a decrease in the market demand, both arise from the problem of seasonal product management and occur during the long production lead time. As an effective tool for hedging against the risks, option contracts, including call, put, and bidirectional option contracts, have been proved to benefit two members in a one-supplier and one-retailer supply chain under inflation. The aim of this paper is to examine the effect of different option contacts on the decisions and performances for both the supplier and the retailer under inflation. Our results suggest that the retailer prefers adopting portfolio contracts with bidirectional options under inflation, whereas the supplier is inclined to provide call option contracts under inflation. Our study also reveals that call option contracts are implemented ultimately by the supply chain under inflation because of the supplier's market dominant position.

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Optimal ordering policy for a price-setting newsvendor with option contracts under demand uncertainty

Cited by 52 publications

References 33 publications

Outsource planning with asymmetric supply cost information through a menu of option contracts

Outsource planning with asymmetric supply cost information through a menu of option contracts

Optimal Ordering and Pricing Policies for Seasonal Products: Impacts of Demand Uncertainty and Capital Constraint

Contracts choice for supply chain under inflation

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