Trading options in supply chain

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Abstract

Originally as a financial concept, options are introduced into supply chain area to improve the ability of handling demand uncertainty and hence seek better performance of the participants. We examine how trading options works in the market consisting of two retailers in both cooperative and non-cooperative scenarios. We find the optimal trading quantity is irrelevant to the options price in both situations, only depending on their current inventory, options in hand and demand information of the second period. Using bargaining theory, we analyze the outcome of trading, as well as the impact on the participants' performance.