Trade-in for cash or for new? Optimal pricing decisions under the government subsidy policy

Businesses and governments have increasingly attached importance to trade-in programs due to their environmental and financial benefits. There are always two programs: trade-old-for-new (TON) and trade-old-for-cash (TOC). Compared with TON, TOC provides old consumers with more flexibility. However, TON may increase the new product sales for firms. In this study, we consider that the manufacturer implements a TON program and the third-party collector provides a TOC program. We study the optimal pricing and subsidy decisions and investigate the effects of the TON subsidy on the firms, consumers, and society. Our main results are: (1) It is optimal to set the new product price at a constant level, independent of the trade-in programs. (2) Consumers focus on the product durability level when they make purchase decisions and firms can improve demand for trade-ins by designing suitable product durability. (3) The TON subsidy benefits the manufacturer, consumers, and society, but hurts the third-party collector when the product durability level is low. Moreover, the effects of subsidy constraints depend on the upper limit of policy constraints and the product durability level. (4) The government subsidy is not as high as possible. A suitable subsidy level should be set according to the subsidy constraints. Our analysis provides insights for firms and government on how to use trade-in programs to maximize profits and social welfare.