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Trade-in Remanufacturing, Customer Purchasing Behavior, and Government Policy

Author

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  • Fuqiang Zhang

    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130)

  • Renyu Zhang

    (New York University Shanghai, Shanghai 200122, China)

Abstract

Trade-in remanufacturing is a commonly adopted business practice under which firms collect used products for remanufacturing by allowing repeat customers to trade in used products for upgraded ones at a discount price. This paper studies how customer purchasing behavior and remanufacturing efficiency affect the economic and environmental values of such a business practice. We demonstrate a new benefit of trade-in remanufacturing: it helps exploit the forward-looking behavior of strategic customers, which could be much more significant than the widely recognized revenue-generating and environmental benefits of remanufacturing. High remanufacturing efficiency does not necessarily benefit a firm. With overly high remanufacturing efficiency, product durability is so high that repeat customers are reluctant to trade in and upgrade their used products. When customers are highly strategic, trade-in remanufacturing creates a tension between profitability and sustainability: on one hand, by exploiting the intensive forward-looking customer behavior, trade-in remanufacturing is quite valuable to the firm; on the other hand, with highly strategic customers, trade-in remanufacturing has a substantial negative impact on the environment and social welfare, since it may induce significantly higher production quantities without improving customer surplus. With nearly myopic customers, however, trade-in remanufacturing benefits both the firm and the environment. Therefore, understanding the interactions between customer purchasing behavior and trade-in remanufacturing is important to both firms and policy makers. Finally, to resolve the above tension, we study how a social planner (e.g., government) should design a public policy to maximize social welfare. The social optimum can be achieved by using a simple linear subsidy/tax scheme for both new production and remanufacturing. The proposed policy can also induce the firm to set the socially optimal remanufacturing efficiency.

Suggested Citation

  • Fuqiang Zhang & Renyu Zhang, 2018. "Trade-in Remanufacturing, Customer Purchasing Behavior, and Government Policy," Manufacturing & Service Operations Management, INFORMS, vol. 20(4), pages 601-616, October.
    • Handle: RePEc:inm:ormsom:v:20:y:2018:i:4:p:601-616
    DOI: 10.1287/msom.2017.0696
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