This Article Full Text (PDF) References Alert me when this article is cited Alert me if a correction is posted Services Email this article to a friend Similar articles in this journal Alert me to new issues of the journal Download to citation manager Citing Articles Citing Articles via HighWire Citing Articles via Google Scholar Google Scholar Articles by Burnetas, A. Articles by Ritchken, P. Search for Related Content

Option Pricing with Downward-Sloping Demand Curves: The Case of Supply Chain Options

Department of Mathematics, University of Athens, Athens 15784, Greece
Department of Banking and Finance, Weatherhead School of Management, Case Western Reserve University, 10900 Euclid Avenue, Cleveland, Ohio 44106
aburnetas{at}math.uoa.gr
peter.ritchken{at}case.edu

This article investigates the role of option contracts in a supply chain when the demand curve is downward sloping. We consider call (put) options that provide the retailer with the right to reorder (return) goods at a fixed price. We show that the introduction of option contracts causes the wholesale price to increase and the volatility of the retail price to decrease. In general, options are not zero-sum games. Conditions are derived under which the manufacturer prefers to use options. When this happens the retailer is also better off, if the uncertainty in the demand curve is low. However, if the uncertainty is sufficiently high, then the introduction of option contracts alters the equilibrium prices in a way that hurts the retailer.

Key Words: real options; downward-sloping demand curve; Stackelberg games; supply chain contracts
History: Received: December 22, 2003;

This article has been cited by other articles:

				E. Katok and D. Y. Wu Contracting in Supply Chains: A Laboratory Investigation Management Science, December 1, 2009; 55(12): 1953 - 1968. [Abstract] [PDF]