Abstract
Introducing proprietary parts to gain a competitive edge is a well-known, yet poorly understood strategy original equipment manufacturers (OEMs) adopt. In this paper, we consider an OEM which sells new products and competes with an independent remanufacturer (IR) selling remanufactured products. The OEM considers using proprietary parts to manage the secondary market for remanufactured products. Thereby, the OEM designs its product to balance the trade-off between the cost of proprietariness and the extra income from selling the proprietary parts to the IR. We observe that the OEM always chooses the smallest possible proportion of proprietary parts. This allows it to control the secondary market without the need to overly adjust the price charged for new products. Deterring market entry by the IR by pricing the proprietary parts prohibitively, an OEM strategy observed in several industries, is only optimal when the willingness-to-pay for remanufactured products is low. Otherwise, the OEM benefits more from sharing the secondary market pro fits with the IR through the use of proprietary parts. Finally, we find that the OEM can also use proprietary parts to strategically deter entry by the IR and discourage it from collecting the cores. This can support the OEM's decision to engage in remanufacturing even in the case of a collection cost disadvantage. We show that - counter intuitively - the OEM may take up remanufacturing in situations where the IR would not. While the introduction of proprietary parts is detrimental to both IRs and consumers, OEM remanufacturing softens this loss for the consumers.
Highlights
Remanufacturing is the process whereby used products are collected and brought back to their original cosmetic and functional conditions (Thierry et al, 1995)
Proposition 1 complements the results from Oraiopoulos et al (2012) for the case of relicensing fees – which arguably coincide with zero proprietariness of the product itself – where it was found that the original equipment manufacturers (OEMs) only deters entry by the independent remanufacturer (IR) if the secondary market is not very profitable, e.g., shown in a low customer valuation δ
Summarizing, our results suggest that using proprietary parts to preempt the secondary market is the preferred option for the OEM only in a minority of possible environments
Summary
Remanufacturing is the process whereby used products are collected and brought back to their original cosmetic and functional conditions (Thierry et al, 1995). It limits consumer choice and contributes to the escalating volume of products that are discarded every year, and that could be otherwise diverted from the landfill to the secondary market It ignores potential revenues from the sales of spare parts to be used in the remanufacturing process that might outweigh the demand cannibalization effect. The OEM can use proprietary parts to obtain exclusive access to the cores, by making the secondary market unprofitable for the IR Having removed this collection barrier, the OEM may find it profitable to engage in remanufacturing.
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