Option Contracts Game Models For Supply Chain With Stochastic Demand Under Inflation

Since the global financial crisis in 2008,there exists a significant slowdown in the global economy growth and the inflationary pressure has been further emerging over the past few years.In recent years,inflation characterizes a type of new normal operational environment and exerts a long-lasting influence on the market.Due to high risks caused by inflation,the firms' daily operation has been influenced.Since the firms are always inseparable from their partners,the supply chain performance has also been influenced.Hence,supply chain management plays the most important part in the success of firms under inflation.On the other hand,due to increasing competition,speedy technological advancement and rapidly changing market,short life cycle products are becoming more and more common.The uncertainties faced by the short life cycle product supply chain are more outstanding under inflation.In order to protect against high risks from multiple sources under a complex environment,options contracts,as an effective risk hedging instrument,are widely applied in various industries and businesses and help them to gain very tangible benefits.Hence,there exist practical and theoretical values in the correlational research on how to reduce the high risks caused by inflation and ensure the efficient operation of the short life cycle product supply chain through the utilization of option contracts.This research considers a one-period two-echelon supply chain consisting of one manufacturer and one retailer.The manufacturer produces one type of short-life-cycle products.The retailer purchases from the manufacturer and then sells to end customers.Since the short-life-cycle products are characterized by a long production lead-time and a short selling period,the retailer must place an order in advance and the manufacturer always decides how many units to produce after receiving the order.Owing to the effect of inflation,both the retail price and the consumer demand in the terminal market will change simultaneously during the long production lead-time.Considering the situation of rising retail price and shrinking market demand caused by the inflation,this paper innovatively incorporates the effect of inflation and option contratcs game into a modeling framework.We formulate option game models based on different option(including call,put and bidirectional option)contracts under inflation,and then investigate the retailer's optimal ordering policy and the manufacturer's optimal production policy.Then,we discuss the impacts of option contracts,the demand risk,the inflation and the contract parameters on the supply chain decisions and performance,respectively.On this basis,we design a bilateral coordination policy for the supply chain from the perspectives of both the retailer and the manufacturer.Finally,through the mutual comparision for the cases with different option contracts,we further discuss the choice for the appropriate option contract type under inflation.The main contents and conclusions of this paper are given as follows.Firstly,we study the call option contracts game model for supply chain with stochastic demand under inflation.Our analytical results reveal that: the utilization of call option contracts benefits both the retailer and the manufacturer under inflation.The retailer prefers to adopt portfolio contracts with call options while the manufacturer is inclined to provide call option contracts under inflation.Since the market dominant position is taken by the manufacturer,call option contracts are implemented by the supply chain under inflation.With call option contracts,as the demand risk rises,the retailer's maximum expected profit decreases while the manufacturer's maximum expected profit increases;as the effect of inflation on the retail price increases,the maximum expected profits of both the retailer and the manufacturer increase;as the effect of inflation on the market demand increases,the maximum expected profits of both the retailer and the manufacturer decrease.Supply chain coordination can be achieved under inflation by rationally designing the parameters of call option contracts.Compared with the non-coordinating contract,there always exists a Pareto contract.Secondly,we study the put option contracts game model for supply chain with stochastic demand under inflation.Our analytical results reveal that: the utilization of put option contracts benefits both the retailer and the manufacturer under inflation.Portfolio contracts with put options are implemented by the supply chain under inflation.With put option contracts,as the demand risk rises,the retailer's maximum expected profit decreases while the manufacturer's maximum expected profit increases;as the effect of inflation on the retail price increases,the maximum expected profits of both the retailer and the manufacturer increase;as the effect of inflation on the market demand increases,the maximum expected profits of both the retailer and the manufacturer decrease.Supply chain coordination can be achieved under inflation by rationally designing the parameters of portfolio contracts with put options.Compared with the non-coordinating contract,there always exists a Pareto contract.Thirdly,we study the bidirectional option contracts game model for supply chain with stochastic demand under inflation.Our analytical results reveal that: the utilization of bidirectional option contracts benefits both the retailer and the manufacturer under inflation.Portfolio contracts with bidirectional options are implemented by the supply chain under inflation.With bidirectional option contracts,as the demand risk rises,the retailer's maximum expected profit decreases while the manufacturer's maximum expected profit increases;as the effect of inflation on the retail price increases,the maximum expected profits of both the retailer and the manufacturer increase;as the effect of inflation on the market demand increases,the maximum expected profits of both the retailer and the manufacturer decrease.Supply chain coordination can be achieved under inflation by rationally designing the parameters of portfolio contracts with bidirectional options.Compared with the non-coordinating contract,there always exists a Pareto contract.Finally,we study the comparison problems for different option contract type under inflation.Our analytical results reveal that: the retailer prefers to adopt portfolio contracts with bidirectional options while the manufacturer is inclined to provide call option contracts under inflation.Since the market dominant position is taken by the manufacturer,call option contracts are implemented ultimately by the supply chain under inflation.With different types of option contracts,as the demand risk rises,the retailer's maximum expected profit decreases while the manufacturer's maximum expected profit increases;as the effect of inflation on the retail price increases,the maximum expected profits of both the retailer and the manufacturer increase;as the effect of inflation on the market demand increases,the maximum expected profits of both the retailer and the manufacturer decrease.This study provides theoretical basis that will help firms to solve difficult problem on choice,design and optimization of option contracts in business practice.Our findings will support the firms optimizing their decisions and improving their performances by employing option contracts when they face the inflationary pressure.Our research will provide a new standpoint for the relative study on supply chain,enrich the scenario of supply chain decision-making and deepen the content of supply chain management.