Monte Carlo Simulation of the Effect of Heterogeneous Too-Cheap Prices on the Average Price Preference for Remanufactured Products

Abstract

A prevailing assumption in research on remanufactured products is “the cheaper, the better”. Customers prefer prices that are as low as possible. Customer price preference is modeled as a linear function with the minimal price at customers’ willingness to pay (WTP), which is assumed to be homogeneous and constant in the market. However, this linearity assumption is being challenged, as recent empirical studies have testified to customer heterogeneity in price perception and demonstrated the existence of too-cheap prices (TC). This study is the first attempt to investigate the validity of the linearity assumption for remanufactured products. A Monte Carlo simulation was conducted to estimate how the average market preference changes with the price of the remanufactured product when TC and WTP are heterogeneous across individual customers. Survey data from a previous study were used to fit and model the distributions of TC and WTP. Results show that a linear or monotonically decreasing relationship between price and customer preference may not hold for remanufactured products. With heterogeneous TC and WTP, the average price preference revealed an inverted U shape with a peak between the TC and WTP, independent of product type and individual customers’ preference function form. This implies that a bell-shaped or triangular function may serve as a better alternative than a linear function can when modeling market-price preference in remanufacturing research.