Revenue Management in a Refurbishing Duopoly with Cannibalization

Abstract

Refurbishing has shown good economic potential but firms remain wary due to the cannibalization effect on new product sales. In this paper, we shed light onto how such firms would need to make their strategic choices under duopolistic competition between firms with different brand strength, and under (often publicly set) collection constraints. We do so by first empirically characterizing consumer behavior in such complex settings, and then utilizing these insights to analytically model and study optimal pricing policies. We show that the inverted-U-shaped cannibalization behavior, that had been demonstrated in a monopolistic setting, is largely absent in a duopolistic setting. Our experimental results further show that cross-cannibalization is an effect to be reckoned with, especially for low-brand firms facing competition from high-brand firms offering refurbished products. Our analytical results show that manufacturers with a strong brand should increase the prices of their refurbished products if the cross-cannibalization coefficients of the low-brand consumers are higher. Low-brand firms instead should focus on beating the high-brand competitors in collection and refurbishing efforts. Finally, we show that the collection constraints have an effect on the pricing strategy of both the high-brand and the low-brand manufacturers. As a consequences, such constraints that are typically set exogenously by public authorities will impact the actual pricing and market equilibria.