Trade-in for remanufactured products: Pricing with double reference effects

Abstract

When organizations introduce programs to trade in old products for remanufactured ones to promote remanufacturing, they offer two options to consumers: buying new products or trading in for remanufactured products, where the latter is a new practice. While most of the extant literature considers only the single reference price effect, there are quality differences in the problem of trading in for remanufactured products. Thus, the reference quality effect cannot be overlooked as before. To handle this new setting, we consider consumers’ double reference effects to examine a manufacturer selling both new and remanufactured products. We also consider the remanufacturing subsidy and the consumer rebate ratio. We analyze five models and develop equilibrium solutions thereof to understand the impacts of double reference parameters and government incentives on pricing strategies, the manufacturer’s profits, and the consumer surplus. Computational examples reveal that (i) both the manufacturer’s profits and the consumer surplus benefit from the double reference effects when the reference price parameter is relatively larger and the reference quality parameter is relatively smaller; (ii) the remanufacturing subsidy is beneficial to the manufacturer, and the consumer rebate ratio only impacts and improves the retail prices of remanufactured products, but does not change the profits of the manufacturer; (iii) when the customers only consider reference price effect, lower unit remanufacturing cost, higher remanufacturing rates, and lower consumers’ discount rates for remanufactured products benefit the manufacturer. Surprisingly, when only the reference quality effect behavior is considered, higher unit remanufacturing cost, lower remanufacturing rates, and higher customers’ discount rates can offset some of the negative impacts of reference quality effects.