Is third-party remanufacturing necessarily harmful to the original equipment manufacturer?

Abstract

Conventional wisdom suggests that competition from a third-party remanufacturer lowers the original equipment manufacturer (OEM)’s profits. In this paper, we show that this may not hold for the remanufacturing competition when the presence of remanufactured products affects the consumers’ perceived value of new products. We introduce two new effects of remanufacturing: (1) third-party remanufacturer (TPR)’s remanufactured products shift the consumer valuation of new products upward, and (2) OEM’s remanufactured products shift the valuation downward. By comparing two alternatives of OEM, i.e., take part in remanufacturing or not, we demonstrate a new benefit of TPR competition. It helps the OEM to exploit the valuation of new product customers. Our results suggest that taking part in remanufacturing does not necessarily benefit an OEM. When TPR remanufactured products have low impact on consumers’ perceived value of new products, and only if the remanufacturing cost is sufficiently low, it is profitable for an OEM to engage in remanufacturing. Otherwise, remanufacturing may reduce profits for the OEM and in this case, the OEM should leave remanufacturing to the TPR. Therefore, facing with TPR competition, understanding the interactions between remanufacturing and perceived value of new products is important to an OEM. In addition, we find that low fraction of used products is not always bad for the TPR, and a high willingness-to-pay for the OEM’s remanufactured products may be harmful for the OEM.