Supply chain coordination via capacity options with uncertain demand and supply

This paper develops a capacity options model in the two-echelon supply chain with the emergent procurement from the spot market. In our model, we deal with not only demand uncertainty but also supply uncertainty. At first, we find the equilibrium of the Stackelberg game and then investigate the effect of uncertainties in the demand and supply on the optimal decision behaviors. We also discuss the value of the options contract and the option flexibility for the manufacturer, the supplier and the supply chain respectively. Then, we study the channel coordination by incorporating the profit sharing rules and find the set of Pareto sharing rules, and we analyze the Nash bargaining game over the Pareto sharing rules and find the optimal sharing rule.