A value-based approach to option pricing: The case of supply chain options

The pricing issue of supply chain options is generally considered in the Stackelberg game framework in the literature. Such a pricing scheme, however, is usually unacceptable to the follower in the game since it serves only the leader's interest. Different from the existing literature, we develop in this paper a value-based pricing scheme for supply chain options. We present the option pricing schemes for the cases of a single retailer and multiple retailers, respectively. The intuition behind our pricing schemes is to price the option based on the value inherent in the "option right". As a result, our pricing schemes are more objective and fair, and consequently are more likely to be accepted by the contracting partners as compared with those that follow the Stackelberg game approach. (c) 2013 Elsevier B.V. All rights reserved.