Start-up remanufacturing firms’ capacity investment: a two-period model

Abstract

Time decisions of capacity investment are critical for start-up third party remanufacturers (3PR), especially when they are involved in downstream competition from their original equipment manufacturer (OEM). Considering a two-period model, we analyze 3PRs’ capacity investment timing issues by assuming their objective to be the maximization of the probability of survival. 3PRs may invest early to enjoy the first-mover advantage, or late to achieve coordination with the OEM and obtain the time value. In this paper, we first consider single 3PR setting and find that whether the 3PR invests early or late is affected by the fixed investment cost, the unit capacity cost and the recognition of the remanufactured products. However, in two competing 3PRs setting, there are three equilibriums: (1) One 3PR invests early, and the other invests late, that is, two symmetric 3PRs lead to an asymmetric equilibrium. (2) Both 3PRs invest early. (3) Both 3PRs invest late. Interestingly, we find that both 3PRs’ investing early may result in “Prisoner’s Dilemma”, although they can be better off by investing late simultaneously. Besides, we note that, the quantity of new products in the first period may limit the end-of-use (EOU) products which are collected for remanufacturing by the 3PRs. This motives the 3PR investing early sometimes takes first-mover the advantage to set a high capacity so as to force the other 3PR to leave the market.