Optimization of pricing and quality choice with the coexistence of secondary market and trade-in program

Presently, many firms are implementing trade-in programs to promote the sale of new products and collect used products. Furthermore, firms sell the used products to the secondary market to avoid the cannibalization problem between new and remanufactured products. This paper aims to explore how the coexistence of the secondary market and trade-in program affects firms’ decisions on quality choice, prices, and trade-in rebate. To this end, we propose a stylized model that captures the features of the secondary market and trade-in program. Further, we consider three models, namely no trade-in program and secondary market (i.e., benchmark case), trade-in program without secondary market and trade-in program with secondary market. We obtain the optimal outcomes under each case via optimization theory. By comparing to the benchmark case, we find that the firm prefers to reduce product quality level and selling price when the trade-in program exists solely. However, if the trade-in program exists together with the secondary market, the firm prefers to increase product quality when the maximal customers’ willingness to pay in the secondary market is high. Otherwise, the firm prefers to lower product quality.