Optimal remanufacturing strategy in the presence of consumer reviews

Abstract

This paper investigates the informative role of consumer reviews and its impact on the original equipment manufacturer’s (OEM) pricing decisions as well as the third-party remanufacturer’s (TIR) entry decisions. The TIR may free ride the consumer reviews to disseminate the experienced quality information of the remanufactured product whereas the OEM may counteractively adjust its pricing strategy to manipulate consumer reviews. We uncover three strategic effects including the informative effect of consumer reviews, the incremental effect of the remanufactured product and the cannibalization effect, which jointly determine the OEM and TIR’s strategies and profits. We show that the presence of consumer reviews endows the OEM and the TIR with more flexibility in crafting their pricing strategy and remanufacturing strategy, respectively, wherein in equilibrium: (1) the TIR are more likely to choose the “partial-remanufacturing” strategy when the experienced quality level of the new product is relatively low but the “full-remanufacturing” strategy otherwise; (2) the OEM prefers to adopt the skimming strategy when the experienced quality level is moderate but the penetration pricing strategy otherwise. Counter-intuitively, we find that the TIR’s entry will attain a “win–win” situation for both players when the experienced quality level is sufficiently low. Our results also show that consumer reviews are not always beneficial to both players, which is closely dependent on the new product’s quality level. We further find that consumers’ heterogeneity in the incremental effect has certain influence on the choices of the OEM’s pricing strategy and the TIR’s remanufacturing strategy.