Promoting remanufacturing through subsidy and environment tax: Channel co-opetition, incentive alignment and regulation optimization

Abstract

Recently, many governments have levied environment tax on production while subsidizing the output of remanufactured components to promote resource-saving and pollution reduction. Considering government’s regulations, this paper investigates whether the supplier selling remanufactured components (Supplier R) should develop a self-brand and whether the original equipment manufacturer (OEM) should keep sourcing from this competitive Supplier R or source from a supplier selling new components (Supplier N). We develop a channel system comprising of Supplier R, Supplier N, and OEM, based on which we analyze their equilibrium decisions in three typical structures (i.e., Base Scenario, Co-opetitive Scenario, Chain-to-chain Scenario). We find the OEM prefers to purchase remanufactured components when (1) its brand image advantage is significant; or (2) its brand image advantage is limited but the environment tax rate is high; or (3) its brand image advantage is limited, the environment tax rate is low, but the subsidy to supplier is high, even if Supplier R has self-brand and competes with the OEM. Our results are both theoretically interesting and practically relevant because we build a unifying model to study the government’s regulation optimization and show a full map for both the component suppliers and the OEMs to decide market encroachment or channel structure configuration.