Buyback Pricing of Durable Goods in Dual Distribution Channels

Abstract

In the U.S. automobile industry, manufacturers distribute products to consumers through dealers and rental agencies. By selling slightly used rental cars to consumers, rental agencies can compete directly against dealers in the sales market. To mediate this conflict between the two intermediaries, manufacturers launched buyback programs to repurchase used rental cars from rental agencies and redistribute them through dealers. Manufacturers have the option to precommit a buyback price to rental agencies at the time of initial sales or postpone the pricing decision to the time of repurchase. Using a two-period model with and without manufacturer competition in the rental market, we seek to understand how to manage buyback pricing to maximize manufacturers' profits in such dual distribution channels. Under precommitted buyback pricing, we show that the monopolist manufacturer's pricing decisions have a submodular property -- when she increases the buyback price in the rental market, she would have to decrease the wholesale price in the sales market. This tradeoff is eliminated under postponed buyback pricing. We find that precommitted buyback pricing not only leads to zero buyback quantity in equilibrium due to a low buyback price but also yields a lower manufacturer profit than postponed buyback pricing. When manufacturers compete in the rental market, however, they may prefer precommitting their buyback prices in equilibrium if the competition is sufficiently intense. This is due to a strategic complementarity between manufacturers' buyback prices.