Joint order and pricing decisions for fresh produce with put option contracts

Abstract

This paper investigates a newsvendor problem for fresh produce with put option contracts, in which the stochastic demand is price sensitive. The newsvendor can obtain products by ordering from a firm and return unsold products by purchasing and exercising put options. The fresh produce incurs a circulation loss in quantity during its transportation. The optimal joint order and pricing decisions for the newsvendor are analytically derived in the presence of put option contracts and circulation loss. Moreover, combined with numerical analysis, the optimal order quantity and selling price of the newsvendor are found to decrease with option price, but increase with exercise price and circulation loss, whereas the maximum expected profit is found to decrease with option price and circulation loss, but increase with exercise price. Furthermore, the newsvendor with put option contracts can deal with the risks that caused by demand uncertainty and high circulation loss of fresh produce.

Keywords:

• Fresh produce
• put option
• pricing
• supply chain management

Acknowledgements

The authors are supported by the National Natural Science Foundation of China [grant number 71272128], [grant number 71432003], [grant number 71602134], [grant number 91646109]; the National Social Science Foundation of China [grant number 15ZDB169].

Notes

Please note this paper has been re-typeset by Taylor & Francis from the manuscript originally provided to the previous publisher.