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Option and forward contracting with asymmetric information: Valuation issues in supply chains

Authors
Journal
European Journal of Operational Research
0377-2217
Publisher
Elsevier
Publication Date
Volume
197
Issue
1
Identifiers
DOI: 10.1016/j.ejor.2008.06.021
Keywords
  • Supply Chain Management
  • Gaming
Disciplines
  • Design

Abstract

Abstract We investigate the role of forward commitments and option contracts between a seller (supplier) and a buyer (retailer) in the presence of asymmetric information. In our case, both parties face price and demand uncertainty but the retailer, being closer to the market, has additional information about the true demand and price. The supplier, aware of this asymmetry, and acting as a Stackelberg leader, designs a contracting arrangement that best meet his interest. We contrast the role of forward and option contracts in this environment and identify cases where combinations of the two are dominant. Finally, we investigate how alternative contracting arrangements alter the expected value of obtaining information that eliminates asymmetric information.

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