Option contract design for a supply chain under price-dependent stochastic demand

In order to make up for the deficiency of the literature about supply cnain option contracts, which all assumed the retail price is fixed and neglects the change in price and its impacts on the stochastic demand, the option contract mechanism is investigated in this supply chain setting. Based on the theory of leader-follower game, the optimal pricing strategies for the option are provided. Finally, the validity of the option contract mechanism is illustrated by a numerical example. The option contract not only coordinates the supply chain also can divide arbitrarily the profit between the manufacturer and the retailer.