Abstract
This article develops a game-theoretic model to value the bidirectional option in a one-manufacturer and one-component-supplier system. The production process of the supplier is subject to random yield. The manufacturer contracts the supplier with bidirectional options to obtain components, and assembles them into end products to meet a stochastic demand. In addition, both firms can sell or/and buy the components on a spot market. First, the unique optimal order and production strategies of the decentralized system under bidirectional option contracts are derived. Second, resorting to numerical example and comparing the bidirectional option model with the call option model, we find that the manufacturer’s optimal firm and total order as well as expected profit under bidirectional options are larger than that of under call options, but the option quantity has the opposite tendency. The supplier’s optimal production quantity are larger under bidirectional options than that of under call options, but only when the option (exercise) price exceeds a certain value, the supplier’s expected profit under bidirectional options will be larger than that of under call options. Third, the coordination of the decentralized system under bidirectional option contracts is analyzed and a coordination mechanism with the contract is designed.
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Acknowledgements
This research is supported by the National key R&D Program of China (No. 2020YFB1711900), Humanities and Social Sciences of Ministry of Education of China (Nos. 17YJC630098, 18YJC630165), National Natural Science Foundation of China (Nos. 71702156, 71802168, 71972136, 91646109).
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Appendix
Appendix
Proof of Lemma 1
Equation (2) show that
It shows that
From \({\overline{\rho }}_{1}={\int }_{{e}_{c}}^{B}{p}_{s}v({p}_{s})d{p}_{s}\) and \({e}_{c}\overline{V}\left({e}_{c}\right)={\int }_{{e}_{c}}^{B}{e}_{c}v({p}_{s})d{p}_{s}\), we know that \({\overline{\rho }}_{1}-{e}_{c}\overline{V}\left({e}_{c}\right)>0\). Therefore, if \({e}_{p}V({e}_{p}/\alpha )-{\alpha \underline {\rho} }_{2} >0\) and \({e}_{c}\overline{V}\left({e}_{c}\right)+{\underline {\rho} }_{2}-\alpha {\overline{\rho }}_{2}-{e}_{p}V({e}_{p}/\alpha )>0\), that is, \({e}_{c}\overline{V}\left({e}_{c}\right)+{\underline {\rho} }_{1}-\alpha {\overline{\rho }}_{2}>{e}_{p}V({e}_{p}/\alpha )>\alpha {\underline {\rho} }_{2}\),then \(\frac{{\partial }^{2}{\pi }_{b}^{m}\left({q}_{b}^{0},{q}_{b}^{1}\right)}{\partial {\left({q}_{b}^{0}\right)}^{2}}<0\). So the Hessian matrix of \({\pi }_{c}^{m}\left({q}_{c}^{0},{q}_{c}^{1}\right)\) is.
\(H\left( {q_{b}^{0} ,q_{b}^{1} } \right) = \left| {\begin{array}{*{20}c} {\frac{{\partial^{2} \pi_{b}^{m} \left( {q_{b}^{0} ,q_{b}^{1} } \right)}}{{\partial \left( {q_{b}^{0} } \right)^{2} }}} & {\frac{{\partial^{2} \pi_{b}^{m} \left( {q_{b}^{0} ,q_{b}^{1} } \right)}}{{\partial q_{b}^{0} \partial q_{b}^{1} }}} \\ {\frac{{\partial^{2} \pi_{b}^{m} \left( {q_{b}^{0} ,q_{b}^{1} } \right)}}{{\partial q_{b}^{1} \partial q_{b}^{0} }}} & {\frac{{\partial^{2} \pi_{b}^{m} \left( {q_{b}^{0} ,q_{b}^{1} } \right)}}{{\partial \left( {q_{b}^{1} } \right)^{2} }}} \\ \end{array} } \right| > 0\).
It reveals that \({\pi }_{b}^{m}\left({q}_{b}^{0},{q}_{b}^{1}\right)\) is jointly concave in \({q}_{b}^{0}\) and \({q}_{b}^{1}\), and its maximum value exists when \({e}_{c}\overline{V}\left({e}_{c}\right)+{\underline{\rho }}_{1}-\alpha {\overline{\rho }}_{2}>{e}_{p}V({e}_{p}/\alpha )>\alpha {\underline{\rho }}_{2}\). From \(\partial {\pi }_{b}^{m}\left({q}_{b}^{0},{q}_{b}^{1}\right)/\partial {q}_{b}^{0}=0\) and \(\partial {\pi }_{b}^{m}\left({q}_{b}^{0},{q}_{b}^{1}\right)/\partial {q}_{b}^{1}=0\), we have
Let \(\mathcal{E}=\frac{{\underline{\rho }}_{1}-w+o+{e}_{c}\overline{V}\left({e}_{c}\right)}{{e}_{p}V\left({e}_{p}/\alpha \right)-\alpha {\underline{p}}_{2}}, \mathcal{G}=\frac{{\bar{\bar{p}}}_{s}+{\overline{\rho }}_{1}-w-o-{e}_{c}\overline{V}\left({e}_{c}\right)}{{\overline{\rho }}_{1}-{e}_{c}\overline{V}\left({e}_{c}\right)},{\mathcal{F}}_{1}=\frac{{e}_{c}\overline{V}\left({e}_{c}\right)+{\underline{\rho }}_{1}-\alpha {\overline{\rho }}_{2}-{e}_{p}V\left({e}_{p}/\alpha \right)}{{e}_{p}V\left({e}_{p}/\alpha \right)-\alpha {\underline{p}}_{2}}\) and \({\mathcal{F}}_{2}=\frac{{e}_{c}\overline{V}\left({e}_{c}\right)+{\underline{\rho }}_{1}-\alpha {\overline{\rho }}_{2}-{e}_{p}V\left({e}_{p}/\alpha \right)}{{\overline{\rho }}_{1}-{e}_{c}\overline{V}\left({e}_{c}\right)}\), we have Lemma 1.
Proof of Lemma 2
From Eq. (4), we can get:
It shows that
So, \({\pi }_{b}^{s}\left({Q}_{b}\right)\) is concave in \({Q}_{b}\), and its maximum value exists. From \(\partial {\pi }_{b}^{s}\left({Q}_{b}\right)/\partial {Q}_{b}=0\) we can get Lemma 2.
Proof of Proposition 1
We can get.
-
(1)
If \(tQ^{c*} < q_{b}^{1*}\), then.
-
(a)
When \(tQ^{c*} < q_{b}^{1*} < x\), \({\Pi }_{b} \left( {q_{b}^{1*} ,q_{b}^{0*} ,Q^{c*} } \right) = rx - \overline{\overline{p}}_{s} E\left( {x - tQ^{c*} } \right) - cQ^{c*} = {\Pi }^{c} \left( {Q^{c*} } \right)\);
-
(b)
When \(tQ^{c*} < x < q_{b}^{1*}\),
$$ \begin{aligned} & {\Pi }_{b} \left( {q_{b}^{1*} ,q_{b}^{0*} ,Q^{c*} } \right) = rx - \overline{\overline{p}}_{s} \left( {q_{b}^{1*} - tQ^{c*} } \right) + \alpha \overline{\overline{p}}_{s} \left( {q_{b}^{1*} - x} \right) - cQ^{c*} \\ & \quad < rx - \overline{\overline{p}}_{s} \left( {q_{b}^{1*} - tQ^{c*} } \right) + \overline{\overline{p}}_{s} \left( {q_{b}^{1*} - x} \right) - cQ^{c*} \\ & \quad = rx - \overline{\overline{p}}_{s} E\left( {x - tQ^{c*} } \right) - cQ^{c*} = {\Pi }^{c} \left( {Q^{c*} } \right) \\ \end{aligned} $$ -
(c)
When \(x < tQ^{c*} < q_{b}^{1*}\),
$$ \begin{aligned} & {\Pi }_{b} \left( {q_{b}^{1*} ,q_{b}^{0*} ,Q^{c*} } \right) = rx - \overline{\overline{p}}_{s} \left( {q_{b}^{1*} - tQ^{c*} } \right) + \alpha \overline{\overline{p}}_{s} \left( {q_{b}^{1*} - x} \right) - cQ^{c*} \\ & \quad < rx - \alpha \overline{\overline{p}}_{s} \left( {q_{b}^{1*} - tQ^{c*} } \right) + \alpha \overline{\overline{p}}_{s} \left( {q_{b}^{1*} - x} \right) - cQ^{c*} \\ & \quad = rx + \alpha \overline{\overline{p}}_{s} \left( {tQ^{c*} - x} \right) - cQ^{c*} = {\Pi }^{c} \left( {Q^{c*} } \right). \\ \end{aligned} $$
-
(a)
-
(2)
If \(q_{b}^{1*} + q_{b}^{0*} > tQ^{c*} > q_{b}^{1*}\), then.
-
(a)
When \(tQ^{c*} > q_{b}^{1*} > x \) and \(tQ^{c*} > x > q_{b}^{1*}\),\({\Pi }_{b} \left( {q_{b}^{1*} ,q_{b}^{0*} ,Q^{c*} } \right) = rx + \alpha \overline{\overline{p}}_{s} \left( {tQ^{c*} - x} \right) - cQ^{c*} = {\Pi }^{c} \left( {Q^{c*} } \right)\);
-
(b)
When \(x > tQ^{c*} > q_{b}^{1*}\), \({\Pi }_{b} \left( {q_{b}^{1*} ,q_{b}^{0*} ,Q^{c*} } \right) = rx - \overline{\overline{p}}_{s} E\left( {x - tQ^{c*} } \right) - cQ^{c*} = {\Pi }^{c} \left( {Q^{c*} } \right)\).
-
(a)
-
(3)
If \(tQ^{c*} > q_{b}^{1*} + q_{b}^{0*}\), then.
-
(a)
When \(tQ^{c*} > q_{b}^{1*} + q_{b}^{0*} > x\),\({\Pi }_{b} \left( {q_{b}^{1*} ,q_{b}^{0*} ,Q^{c*} } \right) = rx + \alpha \overline{\overline{p}}_{s} \left( {tQ^{c*} - x} \right) - cQ^{c*} = {\Pi }^{c} \left( {Q^{c*} } \right)\);
-
(b)
When \(tQ^{c*} > x > q_{b}^{1*} + q_{b}^{0*}\),
$$ \begin{aligned} & {\Pi }_{b} \left( {q_{b}^{1*} ,q_{b}^{0*} ,Q^{c*} } \right) = rx + \alpha \overline{\overline{p}}_{s} E\left( {tQ^{c*} - q_{b}^{1*} - q_{b}^{0*} } \right) - \overline{\overline{p}}_{s} E\left( {x - q_{b}^{1*} - q_{b}^{0*} } \right) - cQ^{c*} \\ & \quad < rx + \alpha \overline{\overline{p}}_{s} E\left( {tQ^{c*} - q_{b}^{1*} - q_{b}^{0*} } \right) - \alpha \overline{\overline{p}}_{s} E\left( {x - q_{b}^{1*} - q_{b}^{0*} } \right) - cQ^{c*} \\ & \quad < rx + \alpha \overline{\overline{p}}_{s} E\left( {tQ^{c*} - q_{b}^{1*} - q_{b}^{0*} } \right) - \alpha \overline{\overline{p}}_{s} E\left( {x - q_{b}^{1*} - q_{b}^{0*} } \right) - cQ^{c*} \\ & \quad = rx + \alpha \overline{\overline{p}}_{s} E\left( {tQ^{c*} - x} \right) - cQ^{c*} = {\Pi }^{c} \left( {Q^{c*} } \right) \\ \end{aligned} $$ -
(c)
When \(x > tQ^{c*} > q_{b}^{1*} + q_{b}^{0*}\),
$$ \begin{aligned} & {\Pi }_{b} \left( {q_{b}^{1*} ,q_{b}^{0*} ,Q^{c*} } \right) = rx + \alpha \overline{\overline{p}}_{s} E\left( {tQ^{c*} - q_{b}^{1*} - q_{b}^{0*} } \right) - \overline{\overline{p}}_{s} E\left( {x - q_{b}^{1*} - q_{b}^{0*} } \right)^{ + } - cQ^{c*} \\ & \quad < rx + \overline{\overline{p}}_{s} E\left( {tQ^{c*} - q_{b}^{1*} - q_{b}^{0*} } \right) - \overline{\overline{p}}_{s} E\left( {x - q_{b}^{1*} - q_{b}^{0*} } \right) - cQ^{c*} \\ & \quad = rx + \overline{\overline{p}}_{s} E\left( {tQ^{c*} - x} \right) - cQ^{c*} = {\Pi }^{c} \left( {Q^{c*} } \right) \\ \end{aligned} $$
-
(a)
Proof of Proposition 2
From Eq. (12), we have:
\(\begin{aligned} & \pi_{b}^{{\text{s}}} \left( {\hat{Q}_{b} } \right) = \left( {w - \overline{\overline{p}}_{s} } \right)\hat{q}_{b}^{1} + \left( {e_{c} \overline{V}\left( {e_{c} } \right) - \overline{\rho }_{1} + o} \right)\hat{q}_{b}^{0} - \left( {1 - \alpha } \right)\overline{\overline{p}}_{s} \mathop \int \limits_{0}^{1} \mathop \int \limits_{0}^{{t\hat{Q}_{b} }} F\left( x \right)dx\varphi \left( t \right)dt \\ & \quad + \left( {\underline {\rho }_{1} - e_{c} \overline{V}\left( {e_{c} } \right)} \right)\mathop \int \limits_{0}^{{\hat{q}_{b}^{1} + \hat{q}_{b}^{0} }} F\left( x \right){\text{dx}} + \left( {e_{p} V\left( {e_{p} /\alpha } \right) - \alpha \underline {\rho }_{2} } \right)\mathop \int \limits_{0}^{{\hat{q}_{b}^{1} - \hat{q}_{b}^{0} }} F\left( x \right)dx \\ { } & \quad { + }\left[ {w - \alpha \overline{\rho }_{2} - e_{p} V\left( {e_{p} /\alpha } \right)} \right]\mathop \int \limits_{0}^{{\frac{{\hat{q}_{b}^{1} }}{{\hat{Q}_{b} }}}} \mathop \int \limits_{{\hat{q}_{b}^{1} }}^{{t\hat{Q}_{b} }} F\left( x \right)dx\varphi \left( t \right)dt - \left( {c - \overline{\overline{p}}_{s} \mu } \right)\hat{Q}_{b} \\ & \quad + [e_{c} \overline{V}\left( {e_{c} } \right) + \underline {\rho }_{e} - \alpha \overline{\rho }_{2} - e_{p} V\left( {e_{p} /\alpha } \right)\mathop \int \limits_{0}^{{\hat{q}_{b}^{1} }} F\left( x \right)dx. \\ & \quad \frac{{d\pi_{b}^{s} \left( {\hat{Q}_{b} } \right)}}{{d\hat{Q}_{b} }} = \left[ {w - \alpha \overline{\rho }_{2} - e_{p} V\left( {e_{p} /\alpha } \right)} \right]\mathop \int \limits_{0}^{{\frac{{\hat{q}_{b}^{1} }}{{\hat{Q}_{b} }}}} \mathop \int \limits_{{\hat{q}_{b}^{1} }}^{{t\hat{Q}_{b} }} F\left( x \right)dx\varphi \left( t \right)d{ } - \left( {1 - \alpha } \right)\overline{\overline{p}}_{s} \mathop \int \limits_{0}^{1} F\left( {t\hat{Q}_{b} } \right)dx\varphi \left( t \right)dt + \left( {\overline{\overline{p}}_{s} \mu - c} \right) \\ & \quad \frac{{d^{2} \pi_{b}^{s} \left( {\hat{Q}_{b} } \right)}}{{d\left( {\hat{Q}_{b} } \right)^{2} }} = \left[ {w - \alpha \overline{\rho }_{2} - e_{p} V\left( {e_{p} /\alpha } \right)} \right]\mathop \int \limits_{0}^{{\frac{{\hat{q}_{b}^{1} }}{{\hat{Q}_{b} }}}} f\left( {t\hat{Q}_{b} } \right)t^{2} \varphi \left( t \right)dt - \left( {1 - \alpha } \right)\overline{\overline{p}}_{s} \mathop \int \limits_{0}^{1} f\left( {t\hat{Q}_{b} } \right)t^{2} \varphi \left( t \right)dt \\ & \quad < \left[ {\left( {w - \overline{\overline{p}}_{s} } \right) - \left( {e_{p} V\left( {e_{p} /\alpha } \right) - \alpha \underline {\rho }_{2} } \right)} \right]\mathop \int \limits_{0}^{{\frac{{\hat{q}_{b}^{1} }}{{\hat{Q}_{b} }}}} f\left( {t\hat{Q}_{b} } \right)t^{2} \varphi \left( t \right)dt \\ \end{aligned}\)So \({\pi }_{b}^{s}\left({\widehat{Q}}_{b}\right)\) is concave in \({\widehat{Q}}_{b}\), we can get Proposition 2 from \({\pi }_{b}^{s}\left({\widehat{Q}}_{b}\right)/\partial {\widehat{Q}}_{b}=0\).
Proof of Proposition 3
To ensure \({\widehat{Q}}_{b}^{*}={Q}^{c*}\), compare Eqs. (14) and (9), we have \(\alpha {\overline{\rho }}_{2}+{e}_{p}V\left({e}_{p}/\alpha \right)-w=0\).
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Luo, J., Chen, X., Wang, C. et al. Bidirectional options in random yield supply chains with demand and spot price uncertainty. Ann Oper Res 302, 211–230 (2021). https://doi.org/10.1007/s10479-021-03986-5
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DOI: https://doi.org/10.1007/s10479-021-03986-5