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 who sells new products and competes with an independent remanufacturer (IR) selling remanufactured products. The OEM contemplates 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 spare parts to the IR. Deterring market entry by the IR through prohibitively pricing the proprietary spare parts, 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 profits 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, discouraging her from collecting cores. This can support the OEM’s decisions to engage in remanufacturing even in the case of a collection cost disadvantage. While the introduction of proprietary parts is detrimental to both IRs and consumers, we show that for consumers such loss is reduced when the OEM engages in product remanufacturing.
Highlights
Remanufacturing is the process whereby used products are collected and brought back to their original cosmetic and functional conditions (Thierry, Salomon, Van Nunen, & Van Wassenhove, 1995)
Sales revenues from proprietary parts outweigh the profit reduction on the primary market due to demand cannibalization. This insight complements the existing literature, which argues that demand cannibalization of new by remanufactured products may be less of an issue for original equipment manufacturers (OEMs) than they expect, as the loss in revenue due to cannibalization is compensated by the secondary market (Atasu, Guide, & Van Wassenhove, 2010; Guide & Li, 2010)
To study the questions posed in the introduction, we use a stylized model of an OEM offering new products only and an independent manufacturer (IR), which may compete with the OEM by remanufacturing used products
Summary
Remanufacturing is the process whereby used products are collected and brought back to their original cosmetic and functional conditions (Thierry, Salomon, Van Nunen, & Van Wassenhove, 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. Sales revenues from proprietary parts outweigh the profit reduction on the primary market due to demand cannibalization This insight complements the existing literature, which argues that demand cannibalization of new by remanufactured products may be less of an issue for OEMs than they expect, as the loss in revenue due to cannibalization is compensated by the secondary market (Atasu, Guide, & Van Wassenhove, 2010; Guide & Li, 2010).
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