Trade-in value effects of used products in remanufacturing with considering consumer purchase behavior

Abstract

This paper considers an original equipment manufacturer (OEM) and a remanufacturer which produce and sell substitutable products (new and remanufactured) to a group of strategic consumers. Using a stylized two-period model, the paper studies the effects of the trade-in value for used products on consumer purchase behavior and two firms’ optimal strategies. Moreover, the value of remanufacturing on consumer surplus, total market share, and the OEM’s profit performance has also been explored. In addition, strategic consumer behavior and other model parameters, such as price reduction coefficient and consumer’s return proportion, have been investigated theoretically and numerically. Analytical Results and numerical evidences show that the optimal prices of both products will increase as more consumers consider the trade-in value or/and the trade-in value increases, leading to fewer satisfied consumers, but the OEM can be better off; both consumers and two firms can be better off as the consumer’s strategic behavior is more intensive, provided that the price reduction coefficient is relatively large. Moreover, when the consumer’s strategic behavior is relatively intensive, the slight price reduction strategy is more profitable for the OEM; while the significant reduction strategy performs better when the consumer’s strategic degree is relatively low. In addition, the incorporation of remanufactured products can make more consumers find their desired products because of better market segmentation, and can also alleviate the negative effect of consumer’s strategic behavior on the OEM’s profit performance. However, remanufacturing will slow down the positive effect of consumer’s strategic behavior on consumer surplus when the reduction coefficient is relatively small. Moreover, another interesting insight of remanufacturing can be provided: It can alleviate the impact of uncertainty in new product cost on the OEM, but exacerbate the impact on consumers.