Choosing the right exchange-old-for-new programs for durable goods with a rollover

Abstract

By offering to trade-in one unit of old product at a discounted price while selling new products, “exchange-old-for-new” (EON) programs have been considered efficient ways of expanding market for durable goods. Starting from the choice behavior of customers, this paper studies optimal pricing and remanufacturing decisions for firms that adopt the EON program. Specifically, considering a supply chain that consists of one manufacturer and one retailer, we investigate two business models: (i) in the manufacturer-initiated scenario, the manufacturer launches an EON program and owns all the old items that are returned; he remanufactures all (or a portion) of the old items and sells them to a secondary market. (ii) In the retailer-initiated scenario, any old items that are returned belong to the retailer; she remanufactures the old items and sells them to the secondary market. An in-depth comparison between the optimal decisions in the two models is conducted in this paper. We show it is possible that a firm may be even more profitable from being a “free-rider”, instead of offering an EON program by himself/herself. Based on a centralized supply chain as a benchmark, an exchange-discount-sharing contract is proposed to coordinate the supply chain and to improve the overall welfare of customers. Numerical experiments are conducted to show the profit impact for the supply chain members, which uncover some interesting managerial insights for the proper adoption of the most efficient EON programs.