Performance Analysis of Contract for Options

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In this dissertation I analyze performance of the contract for options in various settings. In the second chapter, I consider a contract for options between a supplier and a manufacturer in the presence of a spot market with uncertain spot price, limited supplier capacity, and where the manufacturer must fulfill the stochastic demand of a downstream supply-chain link in full. I model the contract negotiation as a two-stage Stackelberg game in which the supplier is the leader. I derive a closed-form expression for the optimal number of options that the manufacturer should purchase, and show the (unrestrictive) conditions under which the supplier's profit is unimodal in the reservation and exercise prices. I make observations based on analytical results and numerical experimentation to assess when such a contract is incentive compatible for the players and effective in coordinating the channel. In the third chapter, I analyze different mechanisms that lead to channel coordination. Specifically, I show channel coordination is achieved by a contract for options when the manufacturer is the leader, when a quantity discount contract is used, and when renegotiation is allowed. I demonstrate how different coordinating mechanisms affect the allocation of the profits between the supplier and the manufacturer and give some insight on when each mechanism might be appropriate. I highlight the desirability of renegotiation as a coordinating mechanism by showing that it is robust -- coordination is achieved despite information asymmetry -- and leads to a more equitable sharing of the contract benefits than do the other mechanisms. In the forth chapter, I evaluate capacity investment decisions of the players in the supply chain consisting of a supplier and two identical manufacturers. I compare the performance of the linear-price contract (when the supplier must use an allocation mechanism) with that of the contract for options. I demonstrate that when the supplier sets transfer prices, the contract for options performs only slightly better than the linear-price contract, which implies that the contract for options is not always an obvious choice over the linear-price contract.
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contract for options; supply chain coordination
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dissertation or thesis
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