Quality choice for product recovery considering a trade-in program and third-party remanufacturing competition

Abstract

As an effective mode for product recovery, trade-in programs have been widely implemented in practice. With a trade-in program, an original equipment manufacturer (OEM) often faces a dilemma of determining the quality of new products, where quality is defined as an observable characteristic that increases consumers' willingness to pay for a product. On the one hand, for the OEM, a choice of higher quality can increase the perceived value of new products; on the other hand, it can also raise the cost of product recovery. In response, we develop game models considering the duopoly situation where an OEM offers a trade-in program to collect used products and faces competition from a third-party remanufacturer (TPR). Specifically, the proposed models capture how an OEM utilizes product quality to compete with a TPR under the presence and absence of a trade-in program. We derive the OEM's optimal quality choice and investigate the effect of the trade-in program and third-party remanufacturing in the Nash equilibrium. Furthermore, we examine how firms' profits and consumer surplus change in the trade-in program through a numerical study. Results indicate that the OEM almost always increases product quality in the trade-in context. Therefore, it is profitable for the OEM to implement the trade-in program to exploit repeat consumers and achieve price discrimination. Interestingly, the trade-in program is a profitable strategy against the TPR, but it is not necessarily detrimental to the TPR. Besides, the trade-in program can offset the positive effect of third-party remanufacturing on consumer surplus.