Pricing and Profit Distribution in Supply Chain Through Option Contracts

Abstract

Supply chain can be simplified into two parts: upstream suppliers and downstream distributors. The authors use option contract to coordinate their relationship. But the instability of pure option contract where supplier and distributor deal only by contract makes it difficult for both sides to reach a consensus. They overcome the defect by combining operation model with wholesale price model, and the mix model can reach Pareto improvement because it will increase supplier and distributor’s profit at the same time. The distribution of the increasing profit will be influenced by many internal factors. Among these internal factors, the risk aversion and bargaining power can affect the profit distribution between supplier and distributor to a large extent. This paper establishes the mathematical model and chooses risk aversion and bargaining power to analyze. They found that 1) the higher the risk aversion level of the distributor or supplier is, the more its profit will be, and 2) the one with more initiative in the negotiation will reap more profits from the other side in supply chain.