Coordinating supply chains with a risk-averse retailer and a call option contract

This paper investigates one risk-neutral supplier and one risk-averse retailer supply chain (SC). To hedge against high risk, the retailer purchases the call option from the supplier. The optimal ordering and production policies with the call option contract are derived. Moreover, it is demonstrated that with the call option contract, the retailer’s optimal order quantity may be increasing in risk aversion level, which can not happen when shortage cost is not considered. Furthermore, the relationship between the retailer’s optimal ordering policy and shortage cost is explored. It is found that when risk aversion and demand uncertainty are incorporated, the condition of supply chain coordination becomes intricate, which are different from the case that the retailer is risk-neutral or shortage cost is not considered.