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

Topics:
Inventory Management,
Pricing Strategy
Tags:
Case Western Reserve University,
Conditions,
Enterprise Software,
Option,
Pricing Strategy,
Retail,
Software,
Supply Chain,
Supply Chain Management (SCM)
Source:
Case Western Reserve University

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Overview: This paper investigates the role of option contracts in a supply chain when the demand curve is downward sloping. The authors consider call (put) options that provide the retailer with the right to reorder (return) goods at a fixed price. The paper shows 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.

(Is this item miscategorized? Does it need more tags? Let us know.)

Format: PDF | Size: 400KB | Date: Dec 2003 | Pages: 38

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