A Coordination Mechanism for a Supply Chain with Option Contract

Consider a supply chain that consists of two players (i.e., a supplier (S) and a retailer (R)), who implement the "Retailer-Stackelberg" ("[rS]") game with an option contract with two price parameters (i.e., an option price and an exercise price). Under symmetric information, R can choose appropriate contract prices to obtain channel coordination. Under asymmetric information, that is when the production cost of S is private information, we examine how the option contract operates with a uniformly distribution demand. In contrast to many studies assuming the private information to be discrete, this paper investigates the coordination mechanism with a continuum of the cost type. We find that R can achieve the same goal as symmetric information by offering a mechanism of option pricing, a function of the declared cost of S, which makes S maximize his profit only by reporting his true cost.