Contract design for increasing supplier´s capacity, in a two-stage supply chain, with stochastic demand

Applications of game theoretic analysis, to supply chain efficiency have focused on contract between a buyer (retailer or manufacturer) and a seller (supplier), in successive stages of a supply chain. In this paper, a JIT environment in which, the manufacturer´s final demand is stochastic is assumed. Supplier makes decision about his raw material capacity and pre-processed materials, before receiving manufacturer´s order, and the manufacturer places his order to the supplier, after final demand is realized.