Buyer-specific versus uniform pricing in a closed-loop supply chain with third-party remanufacturing

Abstract

Managers broadly agree that the entry of third-party remanufacturers (TPRs) is detrimental to original equipment manufacturers (OEMs), and social planners broadly agree that a nondiscriminatory uniform pricing policy is more desirable than a buyer-specific pricing policy. In this study, we develop a game theoretical model to revisit the effects of these policies in a closed-loop supply chain in which one supplier sells a component that cannot be remanufactured to one OEM and one TPR. The supplier must charge the same wholesale price in the uniform pricing model. Our analysis shows that regardless of the pricing policy, third-party remanufacturing could lead to a triple win to the supplier, the OEM, and the TPR. When compared with a buyer-specific pricing policy, a uniform pricing policy may result in a fourfold loss to the supplier, the OEM, the TPR, and the consumers, and hence an absolute reduction in social welfare. The key intuition driving the findings is that under certain conditions, the buyer-specific pricing policy facilitates third-party remanufacturing, which may increase the total profit of the supply chain and improve social welfare. Therefore, the OEM should not always attempt to deter the entry of TPRs. In addition, the government should allow the supplier to charge buyer-specific wholesale prices to foster the remanufacturing sector, particularly in its infancy.