Impact of product sharing and heterogeneous consumers on manufacturers offering trade-in programs

Abstract

Many large manufacturers offer trade-in programs as a way to protect the environment and to generate greater revenues by attracting and retaining consumers. However, the emergence of product-sharing platforms alters consumers’ purchase decisions. We develop an analytical framework for examining how manufacturers that offer trade-in programs can respond to product-sharing markets and heterogeneous consumers. Two classes of consumers are considered: myopic and strategic. This study establishes that a sharing market reduces the manufacturer’s profit when consumers are strategic rather than myopic. Moreover, a smaller salvage value will always (resp. sometimes) boost the manufacturer’s profit when consumers are myopic (resp. strategic). The manufacturer’s profit increases with the product’s depreciation rate and maintenance cost when consumers are myopic, but it may be decreasing in the depreciation rate and maintenance cost when consumers are strategic. We show that these unexpected results follow from the interaction – under certain parameters – between a propelling effect (that encourages consumers to trade in old products) and a hauling effect (that discourages consumers from buying new products). Finally, the manufacturer derives more profit from strategic than from myopic consumers regardless of whether or not there is a product-sharing market.