Option contract model of e-waste recycling reverse supply chain coordination

In reverse supply chain of e-waste, collectors (collecting e-waste from all kinds of resources) and processors (disassembling and disposing e-waste) play key roles and have connections based on interests. We present a Stackelberg leader(collector)-follower(processor) dynamic game model with profit maximization purpose. When the supply and demand are relatively clear, major risk for the processor comes from the uncertainty of price, if the price at which recycled raw material is sold to producer is not enough to compensate for buying, processing and possible land filling e-waste, the processor is unable to make profit. So we propose an option contract in which the collector will buy raw material from the processor at a fixed price in the future. This option will guarantee the processor profitable and increase her effort to order more e-waste from the collector. We show that this contract is Pareto improving in the majority of cases. Our results also indicate that the profit improvement to both parties, and the supply chain is substantial.