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Title: Supply option contracts with spot market and demand information updating
Authors: Zhao, Y
Choi, TM 
Cheng, TCE 
Wang, S
Keywords: Demand information updating
Option contract
Spot market
Supply chain contract
Supply chain management
Issue Date: 2018
Publisher: Elsevier B.V.
Source: European journal of operational research, 2018, v. 266, no. 3, p. 1062-1071 How to cite?
Journal: European journal of operational research 
Abstract: Motivated by the industrial practices, this paper develops a two-stage model to explore the supply option contract in a two-echelon supply chain, taking into account a stochastic spot market and demand information updating of general correlation. We develop a concept called EUOS (expected unit opportunity saving) by which to examine the expected benefit received per unit of the option under different market scenarios. With the concept of EUOS, we develop intuitive analytical results to characterize the optimal strategies for portfolio procurement via the option contract and spot markets, and to design the appropriate option mechanism for supply chain coordination. Furthermore, we reveal that EUOS can be a viable alternative for real option pricing in the supply chain. Detailed comparisons between the mixed market scenario (in which the spot market and the option contract market co-exist) and the scenario with pure spot market or pure option contract market are made, and thereby we analytically examine the effects of supply competition between the spot market and the option contract market. Our paper contributes to the literature by developing intuitive characterizations for the option contract models and generating some new insights with respect to the use of supply option contracts in the supply chain in the presence of a stochastic spot market and demand information updating.
ISSN: 0377-2217
EISSN: 1872-6860
DOI: 10.1016/j.ejor.2017.11.001
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