Buyback Pricing of Durable Goods in Dual Distribution Channels

Abstract

Problem definition: In the U.S. automobile industry, manufacturers distribute products through dealers and rental agencies. To mediate direct competition between the two intermediaries, manufacturers adopted buyback programs to repurchase used rental cars from rental agencies and redistribute them through dealers. We investigate how the timing of buyback pricing affects manufacturers’ profitability and the intermediaries’ ordering decisions by studying two schemes: (1) a precommitted scheme in which a manufacturer precommits to a buyback price at the time of initial sale to rental agencies and (2) a postponed scheme in which a manufacturer postpones the buyback pricing decision to the time of repurchase. Academic/practical relevance: Prior research has not studied the timing of buyback pricing decisions, which is practically relevant because both precommitted and postponed schemes have been adopted by manufacturers in a range of durable-goods industries. Methodology: We used a two-period dynamic Stackelberg game between three types of firms: manufacturer, dealer, and rental agency. Results: A monopolist manufacturer earns a lower profit under the precommitted scheme than under the postponed scheme. The equilibrium buyback quantity is zero under the precommitted scheme but positive under the postponed scheme. These results can be explained by two trade-offs that only exist under the precommitted scheme. First, decreasing the buyback price increases the margin of the manufacturer’s buyback program but decreases the rental agency’s first-period order quantity. Second, increasing the first-period wholesale price offered to the dealer increases the manufacturer’s margin in the sales channel but decreases the rental agency’s first-period order quantity. When manufacturer competition in the rental market is sufficiently intense, a unique equilibrium may arise in which manufacturers choose the precommitted scheme, which maximizes the manufacturers’ profits and yields positive buyback quantity. Managerial implications: The timing of buyback pricing decisions for used durable goods critically affects the profitability of buyback programs in dual distribution channels with dealers and rental agencies. Precommitting to a buyback price may put a manufacturer at a disadvantage because of the intermediaries’ strategic adjustment of their order quantities. However, competition between manufacturers in the rental market may alleviate this disadvantage thanks to a strategic complementarity between competing manufacturers’ buyback prices.