Revenue and Cost Management for Remanufactured Products

This paper considers pricing and remanufacturing strategy of a firm that decides to offer both new and remanufactured versions of its product in the market and is concerned with demand cannibalization. We present a model of demand cannibalization and a behavioral study that estimates a key modeling parameter: a fraction of consumers who switch from new to remanufactured product. As we show, this fraction has an inverted‐U shape, and, thus, the underlying consumer behavior cannot be modeled using the standard methodologies that rely on consumers' willingness to pay (WTP). We find that by incorporating the inverted‐U‐shaped consumer behavior, the firm remanufactures under broader conditions, charges a much lower price, and typically remanufactures more units—leading to an increase of profits from remanufacturing by up to a factor of two as compared with making decisions based on the WTP only. Lastly, we find that the behavior of the low‐price market segment plays an important role because the firm reacts to it differently than the WTP‐based logic would suggest.     

Optimal Policies for Selling New and Remanufactured Products

Because of environmental and economic reasons, an increasing number of original equipment manufacturers (OEMs) nowadays sell both new and remanufactured products. When both products are available, customers will buy the one that gives them a higher (and non‐negative) utility. Thus, if the firm does not price the products properly, then product cannibalization may arise and its revenue may be adversely impacted. In this paper, we study the pricing problem of a firm that sells both new and remanufactured products over a finite planning horizon. Customer demand processes for both new and remanufactured products are random and price‐sensitive, and product returns (also called cores) are random and remanufactured upon receipt. We characterize the optimal pricing and manufacturing policies that maximize the expected total discounted profit. If new products are made‐to‐order (MTO), we show that when the inventory level of remanufactured product increases, the optimal price of remanufactured product decreases while the price difference between new and remanufactured products increases; however, the optimal selling price of new product may increase or decrease. If new products are made to stock (MTS), then the optimal manufacturing policy is of a base‐stock policy with the base‐stock level decreasing in the remanufactured product inventory level. To understand the potential benefit in implementing an MTO system, we study the difference between the value functions of the MTO and MTS systems, and develop lower and upper bounds for it. Finally, we study several extensions of the base model and show that most of our results extend to those more general settings.     

Joint Life‐Cycle Dynamics of New and Remanufactured Products

Many products considered for remanufacturing are durables that exhibit a well‐pronounced product life cycle—they diffuse gradually through the market. The remanufactured product, which is a cheaper substitute for the new product, is often put on the market during the life cycle of the new product and affects its sales dynamics. In this paper, we study the integrated dynamic management of a portfolio of new and remanufactured products that progressively penetrate a potential market over the product life cycle. To this end, we extend the Bass diffusion model in a way that maintains the two essential features of remanufacturing settings: (a) substitution between new and remanufactured products, and (b) a constraint on the diffusion of remanufactured products due to the limited supply of used products that can be remanufactured. We identify characteristics of the diffusion paths of new and remanufactured products. Finally, we analyze the impact of levers such as remanufacturability level, capacity profile and reverse channel speed on profitability.     

Economic and Environmental Assessment of Remanufacturing Strategies for Product + Service Firms

This article provides a data‐driven assessment of economic and environmental aspects of remanufacturing for product + service firms. A critical component of such an assessment is the issue of demand cannibalization. We therefore present an analytical model and a behavioral study which together incorporate demand cannibalization from multiple customer segments across the firm's product line. We then perform a series of numerical simulations with realistic problem parameters obtained from both the literature and discussions with industry executives. Our findings show that remanufacturing frequently aligns firms' economic and environmental goals by increasing profits and decreasing the total environmental impact. We show that in some cases, an introduction of a remanufactured product leads to no changes in the new products' prices (positioning within the product line), implying a positive demand cannibalization and a decrease in the environmental impact; this provides support for a heuristic approach commonly used in practice. Yet in other cases, the firm can increase profits by decreasing the new product's prices and increasing sales—a negative effective cannibalization. With negative cannibalization the firm's total environmental impact often increases due to the growth in new production. However, we illustrate that this growth is nearly always sustainable, as the relative environmental impacts per unit and per dollar rarely increase.     

Fusion Product Planning: A Market Offering Perspective*

Devices that integrate multiple functions together are popular in consumer electronic markets. We describe these multifunction devices as fusion products as they fuse together products that traditionally stand alone in the marketplace. In this article, we investigate the manufacturer's fusion product planning decision, adopting a market offering perspective that allows us to address the design and product portfolio decisions simultaneously. The general approach adopted is to develop and analyze a profit‐maximizing model for a single firm that integrates product substitution effects in identifying an optimal market offering. In the general model, we demonstrate that the product design and portfolio decisions are analytically difficult to characterize because the number of possible portfolios can be extremely large. The managerial insight from a stylized all‐in‐one model and numerical analysis is that the manufacturer should, in most cases, select only a subset of fusion and single‐function products to satisfy the market's multidimension needs. This may explain why the function compositions available in certain product markets are limited. In particular, one of the key factors driving the product portfolio decision is the margin associated with the fusion products. If a single all‐in‐one fusion product has relatively high margins, then this product likely dominates the product portfolio. Also, the congruency of the constituent single‐function products is an important factor. When substitution effects are relatively high (i.e., the product set is more congruent), a portfolio containing a smaller number of products is more likely to be optimal.     

A Competitive Model of Customization with Lead‐Time Effects

In this article, we study the competitive interactions between a firm producing standard products and a firm producing custom products. Consumers with heterogeneous preferences choose between n standard products, which may not meet their preferences exactly but are available immediately, and a custom product, available only after a certain lead time l. Standard products incur a variety cost that increases with n and custom products incur a lead time cost that is decreasing in the lead time l. We consider a two‐stage game wherein at stage 1, the standard product firm chooses the variety and the custom firm chooses the lead time and then both firms set prices simultaneously. We characterize the subgame‐perfect Nash equilibrium of the game. We find that both firms can coexist in equilibrium, either sharing the market as local monopolists or in a price‐competitive mode. The standard product firm may offer significant or minimal variety depending on the equilibrium outcome. We provide several interesting insights on the variety, lead time, and prices of the products offered and on the impact of problem parameters on the equilibrium outcomes. For instance, we show that the profit margin and price of the custom product are likely to be higher than that of standard products in equilibrium under certain conditions. Also, custom firms are more likely to survive and succeed in product markets with larger potential market sizes. Another interesting insight is that increased consumer sensitivity to product fit may result in lower lead time for the custom product.     

An Analysis of the Eco‐Efficiency of Remanufactured Personal Computers and Mobile Phones

Remanufacturing, long perceived as an environmentally friendly initiative, is supported by a number of governments. Yet, the assumption that remanufacturing is desirable to society has never been systematically investigated. In this paper, we examine the effectiveness and eco‐efficiency of remanufacturing in the personal computer and mobile phone industries. We investigate whether remanufacturing substantially reduces the environmental impact, as measured by cumulative energy demand (CED), generated over the life cycles (LCs) of these products, and the size of any reduction. We also examine the relative eco‐efficiency of remanufacturing compared with virgin manufacturing for these two products, where eco‐efficiency includes both willingness‐to‐pay (WTP) for the products as well as the energy consumed in producing the products. Our main findings are the following. One, remanufacturing is an effective way to reduce the total energy consumed during the LCs of personal computers and mobile phones, with one notable exception, when the life spans of remanufactured products are substantially shorter than the life spans of their new counterparts. Two, a remanufactured personal computer or mobile phone is not always more eco‐efficient than a corresponding new product. Three, the WTP for remanufactured personal computers and mobile phones, and consequently, their eco‐efficiencies, are a function of the prices of the correspondent new products at launch and years elapsed between launch and remanufacturing. Four, remanufactured units are sold at a discount relative to the price of new personal computers and mobile phones. Five, on the whole, the market for remanufactured mobile phones is more eco‐efficient than the market for new mobile phones. Six, the market for remanufactured computers is more eco‐efficient than the market for new computers. Lastly, because the group of remanufactured products is heterogeneous, not all remanufactured units are more eco‐efficient than the average new computer and mobile phone. We conclude with a discussion of the impact of our findings on European WEEE and WEEE‐like legislation.     

Forecasting Product Returns for Remanufacturing Operations

Driven by legislative pressures, an increasing number of manufacturing companies have been implementing comprehensive recycling and remanufacturing programs. The accurate forecasting of product returns is important for procurement decisions, production planning, and inventory and disposal management in such remanufacturing operations. In this study, we consider a manufacturer that also acts as a remanufacturer, and develop a generalized forecasting approach to determine the distribution of the returns of used products, as well as integrate it with an inventory model to enable production planning and control. We compare our forecasting approach to previous models and show that our approach is more consistent with continuous time, provides accurate estimates when the return lags are exponential in nature, and results in fewer units being held in inventory on average. The analysis revealed that these gains in accuracy resulted in the most cost savings when demand volumes for remanufactured products were high compared to the volume of returned products. Such situations require the frequent acquisition of cores to meet demand. The results show that significant cost savings can be achieved by using the proposed approach for sourcing product returns.     

Supply Chain Management of Fresh Products with Producer Transportation*

This article considers a class of fresh‐product supply chains in which products need to be transported by the upstream producer from a production base to a distant retail market. Due to high perishablility a portion of the products being shipped may decay during transportation, and therefore, become unsaleable. We consider a supply chain consisting of a single producer and a single distributor, and investigate two commonly adopted business models: (i) In the “pull” model, the distributor places an order, then the producer determines the shipping quantity, taking into account potential product decay during transportation, and transports the products to the destination market of the distributor; (ii) In the “push” model, the producer ships a batch of products to a distant wholesale market, and then the distributor purchases and resells to end customers. By considering a price‐sensitive end‐customer demand, we investigate the optimal decisions for supply chain members, including order quantity, shipping quantity, and retail price. Our research shows that both the producer and distributor (and thus the supply chain) will perform better if the pull model is adopted. To improve the supply chain performance, we propose a fixed inventory‐plus factor (FIPF) strategy, in which the producer announces a pre‐determined inventory‐plus factor and the distributor compensates the producer for any surplus inventory that would otherwise be wasted. We show that this strategy is a Pareto improvement over the pull and push models for both parties. Finally, numerical experiments are conducted, which reveal some interesting managerial insights on the comparison between different business models.     

Product Portfolio Strategies: The Case of Multifunction Products

Motivated by the proliferation of multifunction products, we investigate product portfolio decisions of a single firm by analyzing the impact of three major factors. First, because multifunction products provide complete or partial functionalities of single‐function products, we incorporate substitution or cannibalization effects between the potential products. Second, we explicitly model the variable costs of manufacturing the single‐function and multifunction products. Third, we examine the firm's pricing decisions because of their impact on the degree of cannibalization between the multifunction product and one or more single‐function products. Using an economic model, we first characterize the firm's optimal product portfolio (through a quantity‐based decision), which in turn determines the market equilibrium prices for each product in its portfolio. Some of the unique insights stemming from our analysis are: (a) the optimal product portfolio choice is driven primarily by maximum profit margins for the single‐function products weighted by the demand substitution effects; and (b) from a product design perspective, the complete functionality of the base single‐function product is always included in the optimal product offering, but this is not necessarily the case with the complete functionality of the nonbase single‐function product.     

Efficient Competition Through Cheap Talk: The Case of Competing Auctions

We consider a large market where auctioneers with private reservation values compete for bidders by announcing cheap‐talk messages. If auctioneers run efficient first‐price auctions, then there always exists an equilibrium in which each auctioneer truthfully reveals her type. The equilibrium is constrained efficient, assigning more bidders to auctioneers with larger gains from trade. The choice of the trading mechanism is crucial for the result. Most notably, the use of second‐price auctions (equivalently, ex post bidding) leads to the nonexistence of any informative equilibrium. We examine the robustness of our finding in various dimensions, including finite markets and equilibrium selection.     

基于异质性消费群体的再制造产品的定价策略研究

消费者对新产品和再制造产品具有不同支付意愿。在此基础上,对再制造产品具有不同接受度的异质性消费群体分别建立了再制造产品差异化定价模型和单一定价策略模型。研究了制造商对新产品和再制造产品进行差异化定价时,新产品和再制造产品的最优定价和与之相对应的产品回收率,并与单一定价策略进行了比较分析。通过数值仿真,讨论了不同参数对单一定价策略和差异化定价策略的利润和产品回收率的影响,并给出了相关结论。     

First‐Price Auctions With General Information Structures: Implications for Bidding and Revenue

We explore the impact of private information in sealed‐bid first‐price auctions. For a given symmetric and arbitrarily correlated prior distribution over values, we characterize the lowest winning‐bid distribution that can arise across all information structures and equilibria. The information and equilibrium attaining this minimum leave bidders indifferent between their equilibrium bids and all higher bids. Our results provide lower bounds for bids and revenue with asymmetric distributions over values. We also report further characterizations of revenue and bidder surplus including upper bounds on revenue. Our work has implications for the identification of value distributions from data on winning bids and for the informationally robust comparison of alternative auction mechanisms.     

A Study of Online Auction Sellers’ Intention to Switch Platform: The Case of Yahoo!Kimo Versus Ruten_eBay*

The study of consumers’ switching from one service provider to another has a long tradition in economics, information systems, and marketing. The emergence of electronic commerce presents new challenges in understanding consumers’ switching intentions in the context of e‐commerce in general and online auctions in particular. With the abundance of literature on online auctions, there is a surprising lack of research on auction sellers’ intentions to switch from one online auction platform to another. Using the competition between Yahoo!Kimo and Ruten_eBay, two leading auction platforms in Taiwan, as the backdrop, we developed a research model and collected empirical data based on this real case to study what factors influence auction sellers to switch to a competing service provider. We find that the higher the procedural switching costs, financial switching costs, relational switching costs, site design quality, or interaction quality, the lower the intention of an auction seller to switch to a competing auction service provider. A higher perceived transaction fee, however, leads to a higher switching intention.     

Take‐Back Legislation: Consequences for Remanufacturing and Environment

In the last two decades, many countries have enacted product take‐back legislation that holds manufacturers responsible for the collection and environmentally sound treatment of end‐of‐use products. In an industry regulated by such legislation, we consider a manufacturer that also sells remanufactured products under its brand name. Using a stylized model, we consider three levels of legislation: no take‐back legislation, legislation with collection targets, and legislation with collection and reuse targets. We characterize the optimal solution for the manufacturer and analyze how various levels of legislation affect manufacturing, remanufacturing, and collection decisions. First, we explore whether legislation with only collection targets causes an increase in remanufacturing levels, which is argued to be an environmentally friendlier option for end‐of‐use treatment than other options such as recycling. While increased remanufacturing alone is usually perceived as a favorable environmental outcome, if one considers the overall environmental impact of new and remanufactured products, this might not be the case. To study this issue, we model the environmental impact of the product following a life cycle analysis–based approach. We characterize the conditions under which increased remanufacturing due to take‐back legislation causes an increase in total environmental impact. Finally, we model the impact of legislation on consumer surplus and manufacturer profits and identify when total welfare goes down because of legislation.     

Segmentation Opportunities for a Social Planner: Impact of Limited Resources

In this research note, we investigate segmentation opportunities for social planners such as government agencies, nonprofits, and public organizations. These opportunities arise when the potential products are vertically (quality) differentiated and the consumers are heterogeneous in their preferences toward quality. In these cases, whether to offer quality differentiated products and what quality level to choose are important decisions for a social planner. In this research note, we identify the conditions where it is socially optimal to offer either one homogenous or two quality differentiated products. We find that the resource limitations may result in a single product offering and that the quality of the product depends on the maximum surplus per unit resource consumed by the products. We also compare our findings to a profit‐maximizing firm. We find that the resource limitations may cause a profit‐maximizing firm to provide a better service to some consumers than the social planner. Contrary to common wisdom, we also show that the capacity limitations may force the social planner to act like a profit‐maximizing firm in terms of its pricing and product mix choice.     

Delayed Differentiation for Multiple Lifecycle Products

Modular design allows several generations of products to co‐exist in the installed base as product designs change to take advantage of improved performance via modular upgrades. Use of a common base platform and modular design approach allows a firm to offer updates for improved performance and flexibility via remanufacturing when products have multiple lifecycles. However, as the product evolves through multiple lifecycles, the large pool of product variants leads to the curse of product proliferation. In practice, product proliferation causes high levels of line congestion and results in longer lead times, higher inventory levels, and lower levels of customer service. To offer insights into the product proliferation problem, the authors employ a delayed differentiation model in a multiple lifecycle context. The delayed differentiation model gives flexibility to balance trade‐offs between disassembly and reassembly costs by adaptively changing the push‐pull boundary. An adaptive, evolving push‐pull boundary provides flexibility for a remanufacturing firm to meet changing customer demands. The delayed differentiation model includes both a mixed‐integer linear program and an analytical investigation of the evolutionary nature of the push‐pull boundary. Both field observations and experimental results show that the nature of product proliferation and changing demand structures play significant roles in the cost and flexibility of the evolving delayed differentiation system.     

Does the Entry of Third‐Party Remanufacturers Always Hurt Original Equipment Manufacturers?

Researchers and managers broadly agree that the entry of third‐party remanufacturers (TPRs) hurts original equipment manufacturers (OEMs) because of the cannibalization problem. Thus, OEMs should always try to deter the entry of TPRs. In this article, we present a contrasting view: Competing OEMs without remanufacturing capacities sometimes benefit from the entry of TPRs. The key feature of our model is that there exists a group of newness‐conscious consumers in the market who do not buy the remanufactured product regardless of the price, whereas a group of functionality‐oriented consumers (FOCs) may buy a remanufactured one at a low price. In a steady‐state‐period setting, we investigate how the number of TPRs affects the OEMs’ profits. We find that, from the perspective of two competing OEMs: (i) The entry of one or many TPRs may lead to a higher profit; (ii) The entry of many TPRs may be better than the entry of one TPR; and (iii) The impact of the entry of one or many TPRs may be reversed as FOCs’ willingness‐to‐pay for the remanufactured product increases.