Rebate and option contracts in a supply chain

This document compares the performance for the companies forming a dyadic supply chain, and for the chain as a single unit, under two types of contracts: option and rebate. The companies forming the chain are a retailer and its supplier. Under an option contract, the retailer orders a quantity of units and has a right to modify his order in any sense (it may be bigger or smaller than the initial order) without restrictions by buying the option premium in advance from the supplier. Under a rebate contract, the supplier offers a rebate for the units ordered over a certain number of units previously fixed. With an option contract, the retailer reserves a number of units from the supplier and, after receiving more information about demand, he will pass his final order. With a rebate contract, the retailer will decide from the beginning the number of units to order knowing the rebate condition (price and quantity). First the theoretical bases are introduced for each contract, next both models are compared, then simulation results are presented and discussed and finally we conclude