Coordination of supply chains by contracts

Supply chain is a decentralized system where material, financial, information and decision flows connect members. Double marginalization is a well-known cause of supply chain inefficiency and the problem occurs whenever the supply chain's profits are divided among two or more members and at least one of the members influences price-dependent demand. Supply chain contract is a coordination mechanism that provides incentives to all of its members so that the decentralized supply chain behaves as the integrated one. When the demand is stochastic than the newsvendor model can be applied. The newsvendor model is not complex, but it is sufficiently rich to study important questions in supply chain coordination. In a standard newsvendor problem the price is assumed to be fixed. The aim of this paper is to analyze contracts for the combined problem of supply chain coordination with price-dependent stochastic demand.