(Un)conditional Collection Policies on Used Products with Strategic Customers

Abstract

Used product collection is a business practice widely adopted by firms to pursue the substantial economic value of product remanufacturing and to comply with regulatory policies imposed by governments. This paper considers the optimal design of a manufacturer's collection policy to encourage customers to return used products and make replacement purchases for upgraded products when facing strategic customer purchasing behavior and an independent secondary market. Specifically, we focus on whether the manufacturer should impose conditions on the compensation for returned goods that take future purchase decisions into account. Both conditional (trade-in) and unconditional (buy-back) collection policies take place in practice and are studied separately in literature. However, the prior research did not jointly evaluate their performance in the presence of a secondary market. We use a game theoretical model to study used products collection policies and the impact of an independent secondary market. We find that, in the absence of a secondary market, a conditional collection policy can outperform an unconditional one when either the unit production cost or the residual value of the returned product is low. However, when there is an independent secondary market that allows customers to trade used products with each other, any conditional policy cannot outperform the optimal unconditional policy. In particular, the two policies generate the same profit if the residual value of the used product is low; otherwise, the unconditional policy dominates. Finally, we show that the existence of a secondary market can increase the profit of the manufacturer when customers behave highly strategic. Our study helps to understand the impact of strategic customer behavior and the secondary market on the choice of used product collection policy. The findings provide manufacturers with guidance on the design of the optimal collection policy.