Should original equipment manufacturers authorize third-party remanufacturers?

Abstract

Remanufacturing is well-established as a means for original equipment manufacturers (OEMs) to reduce waste, save on raw materials costs, and tap into new markets. At the same time, OEMs are often skeptical of remanufacturing due to the potential for remanufactured items to steal market share from new items. Third-party remanufacturers (TPRs) experience no such skepticism, since these market players do not sell new items. TPRs often find profit potential in acquiring used items in the marketplace, refurbishing, and reselling them. In response, some OEMs choose to “authorize” these TPRs, as a way to control quality and reputation, while other OEMs do not provide such authorization. By authorizing TPR, an OEM can realize additional revenues from the authorization fees. However, there are two potential downsides: authorization might enhance the perceived value of TPR’s remanufactured products and therefore their competitiveness against new items, and it might trigger quality concerns for the OEM’s new products. The net impact of authorization on OEM and TPR prices and profits, and the optimal structure of an authorization fee, will depend critically on how authorization impacts consumer willingness to pay for new and remanufactured products. We develop an analytical model that enables us to suggest optimal authorization fees and to provide insights into the conditions under which both parties can increase profits when authorization is present. We show that, under certain conditions, TPR authorization can enable the entry of an otherwise-unprofitable TPR into the market, while at the same time increasing OEM profits.