Retailer’s Make-or-buy Decision for Remanufactured Products under In-house Yield Uncertainty

Abstract

Remanufacturing is a sustainable practice as it can save resources and alleviate environmental pollution. However, the process of remanufacturing can be subject to yield uncertainty if the manufacturer is not sufficiently professional. In this paper, we consider a retailer selling both new and remanufactured products, where the retailer has the option to either produce the remanufactured product in-house under yield uncertainty (Scenario I), or remove this uncertainty by purchasing from a third-party remanufacturer (Scenario O). We develop a game theoretic model to investigate the retailer’s make-or-buy decision in the presence of in-store competition between the new and remanufactured products. We find that, interestingly, the high consumer’s valuation of the remanufactured product might result in a low retail price of the remanufactured product, which in turn induces the new product supplier to lower its wholesale price in Scenario O. We further find that the retailer can be better off by purchasing from the third-party remanufacturer because the new product supplier will strategically lower the wholesale price anticipating the intensified downstream competition. This may even benefit the new product supplier and hence, achieve a win-win situation.