Coordination of supply chains by option contracts: A cooperative game theory approach

Yingxue Zhao, Shouyang Wang, Edwin Tai Chiu Cheng, Xiaoqi Yang, Zhimin Huang

Research output: Journal article publicationJournal articleAcademic researchpeer-review

205 Citations (Scopus)


Manufacturer-retailer supply chains commonly adopt a wholesale price mechanism. This mechanism, however, has often led manufacturers and retailers to situations of conflicts of interest. For example, due to uncertain market demand, retailers prefer to order flexibly from manufacturers so as to avoid incurring inventory costs and to be able to respond flexibly to market changes. Manufacturers, on the other hand, prefer retailers to place full orders as early as possible so that they can hedge against the risks of over- and under-production. Such conflicts between retailers and manufacturers can result in an inefficient supply chain. Motivated by this problem, we take a cooperative game approach in this paper to consider the coordination issue in a manufacturer-retailer supply chain using option contracts. Using the wholesale price mechanism as a benchmark, we develop an option contract model. Our study demonstrates that, compared with the benchmark based on the wholesale price mechanism, option contracts can coordinate the supply chain and achieve Pareto-improvement. We also discuss scenarios in which option contracts are selected according to individual supply chain members' risk preferences and negotiating powers.
Original languageEnglish
Pages (from-to)668-675
Number of pages8
JournalEuropean Journal of Operational Research
Issue number2
Publication statusPublished - 1 Dec 2010


  • Channel coordination
  • Cooperative game
  • Negotiating power
  • Option contract
  • Supply chain management

ASJC Scopus subject areas

  • Modelling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management


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