Coordination of supply chains with stochastic demand through option contract

This paper develops a model to study channel coordination and risk sharing in a supply chain with stochastic demand. We investigate a coordinating contract based on an option with two parameters. The option price and the exercise price are determined by the supplier. Based on the decision models which are set up for different members, the supplier´s optimal pricing and capacity policy are discussed, as well as the retailer´s ordering strategy. According to the analysis of option mechanism, we prove that such a contract brings benefit to each party.