Designing manufacturer’s new product technology for a closed-loop supply chain with consumer context effect

Abstract

As commonly believed, without consumer context effect, manufacturers facing horizontal competition from independent remanufacturers/refurbishers may reduce the remanufacturability of new products. Nevertheless, given the retailer’s refurbishment capability, we examine how a manufacturer’s product design, as measured by the technology level of the new product, is influenced by vertical competition from a retailer and consumer context effect. We consider three scenarios: (1) a vertical supply chain where the retailer lacks refurbishment capability, (2) a closed-loop supply chain involving a retailer with refurbishment capability, and (3) a closed-loop supply chain with consumer context effect which implies that retailer-refurbished products positively influence the perceived value of the manufacturer’s new products. We propose a game-theoretical model to determine the manufacturer’s optimal product technology level and pricing strategy, as well as the retailer’s pricing and refurbishment decisions. We show that, with the retailer’s refurbishment capability, although refurbished products of the retailer will cannibalize new products of the manufacturer, the manufacturer may design a low technology level instead of a high one. Our analysis also reveals that, under certain conditions, the profits of the manufacturer, retailer, and supply chain can increase with the emergence of the retailer’s refurbishment capability, compared to the scenario where the retailer lacks this capability. Furthermore, our findings suggest that in the presence of consumer context effect, even if refurbished products positively impact the perceived value of new products, the manufacturer may design a higher technology level to alleviate the vertical competition.