A Comparative Analysis on Buy-back Contracts and Put Option Contracts

We formulate the decision models under three different contracts in the stochastic demand condition respectively: wholesale price contracts, buy-back contracts and portfolio contracts with put options. By taking the wholesale price contracts model as a benchmark, we find that the introduction of either buy-back contracts or put option contracts can prompt the retailer to increase the initial firm order quantity. Moreover, we find that only when some certain conditions are satisfied, the retailer's optimal firm order quantity under buy-back contracts is equivalent to that under portfolio contracts with put options. Furthermore, we find that the presence of either buy-back contracts or put option contracts is effective in achieving the channel coordination and the Pareto improvement. Unit exercise price of put option is always higher than unit buyback price in the coordinating supply chain.