Optimal trade-in programs for quality differentiated recycled products

Abstract

Prior research mostly focuses on traditional trade-in programs where there is no up-front fee. Motivated by recent industrial practice that firms implement quality differentiated trade-in programs with up-front fees (TF programs), we investigate three types of TF programs: only recycling low-quality old products, only recycling high-quality old products, and recycling low- and high-quality old products. Compared with the traditional trade-in model, the firm sets a lower selling price in TF models. Specifically, when the consumers’ value discount for used products is low, the selling price in the TF model that recycles low- and high-quality old products is the lowest; when the value discount is high, the selling price in the TF models that recycles low- and high-quality old products or only recycle low-quality old products may be the lowest. Interestingly, we find that all types of TF programs lead to lower trade-in rebates for replacement consumers than the traditional trade-in program. The firm with the TF program that recycles low- and high-quality products serves most consumers and charges the highest recycling quantity. Finally, we extend the models and verify the robustness of our main conclusions.