Impact of government subsidy on the remanufacturing industry

Abstract

In order to decrease environment pollution and the usage of raw material, some governments use subsidy policy to encourage the Original Equipment Manufacturer (OEM) and the Independent Remanufacturer (IR) to remanufacture. While, how government subsidy affects remanufacturing activity and industry competition is still unclear. In our research, there are an OEM and an IR in the market. And the OEM and the IR have three different choices of remanufacturing: no-remanufacturing, remanufacturing part, and remanufacturing all. This research builds a game-theoretic model to discuss the impact of government subsidy on manufacturing and remanufacturing quantities, consumer surplus, OEM and IR profit, social surplus and environment for each choice of the OEM and the IR. The result shows that the amount of the OEM remanufacturing decreases with government subsidy when the OEM remanufactures all but the IR remanufactures part. OEM and IR profit, and consumer surplus may decrease with government subsidy in some competitive markets. Total social surplus may also decrease in government subsidy when OEM-IR competition exists in a remanufactured market or only the IR remanufactures part. The change of the total environment impact depends on the relative environment impact of unit manufactured and remanufactured product when OEM or IR remanufactures part. Thus, it is not always a great strategy for policy makers to only increase government subsidy in order to decrease environment pollution and improve social surplus. Before increasing government subsidy, policy makers need to more learn about the competitive markets and environment impact per unit product. Finally, numerical study is conducted to confirm these findings, discuss what happens when the willingness-to-pay of consumers for remanufactured products changes, and analyze the impact of different levels of environment impact per remanufactured product on total environment.