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.