The value of acquisition price differentiation in reverse logistics

The quality of returned products may vary greatly, depending on their previous usage. Since the remanufacturing of products in good condition is more economically rewarding for the remanufacturer—and since even for non-remanufacturable products the value that can be extracted from their parts or materials may depend on the products’ quality—it seems logical to acquire used products of different quality levels at different prices. However, acquisition price differentiation requires the product quality to be revealed, i.e. the products are graded before their actual acquisition. We observe two different approaches in current practice. The first one is a decentralized system with several collection sites to which the customers can bring their used products. After a short grading procedure, they receive a specific acquisition price offer for their products, which they can accept or decline directly. The second setting is a reverse logistics system with a centralized grading facility. The final grading is conducted after shipping the used products to this specific facility. Motivated by these empirical observations, we compare the two strategies with the help of a continuous approximation model. We derive analytical expressions for the optimal pricing and network density decision and show that, in addition to the other factors discussed in the literature, acquisition price differentiation can be a reason for decentralizing the reverse logistics network, if the product quality is uncertain. Furthermore, we illustrate our results with a numerical example.