The Effect of Introducing Upgraded Remanufacturing Strategy on OEM’s Decision

Abstract

Although remanufacturing has great economic and environmental potential, internal cannibalization, and lack of consumer acceptance of remanufactured products prevent original equipment manufacturer (OEM) from realizing the full potential value through remanufacturing. Practices show that remanufactured products can realize their value by the donation, besides resale. Thus, this paper incorporates the donation of remanufactured products with government subsidy and presents an upgraded remanufacturing strategy to expand the demand for remanufactured products and weaken the internal cannibalization of remanufactured products. We respectively construct the two-period game model with and without upgraded remanufacturing and explore the effect of upgraded remanufacturing on production decision, economic and environmental benefits. The main conclusions are as follows. The donation subsidy is negatively related with the sale quantity of remanufactured products, but is positively related with the donation quantity of remanufactured products and the quantity of new products. The donation subsidy expands the demand for remanufactured products and weakens internal cannibalization of remanufactured products. Whether the upgraded remanufacturing strategy is profitable depends on the fixed cost of the remanufacturing. When consumers consider remanufactured products environmentally friendly, the government can realize an OEM’s win-win situation where the economic and environmental benefits get improved by adjusting the donation subsidy. Otherwise, introducing upgraded remanufacturing makes the environment worse. Comparatively speaking, a low-cost and environmentally friendly manufacturer is relatively easier to achieve the win-win situation through donation subsidy.