The optimality of second-hand business decisions in the presence of consumer valuation uncertainty

Valuation uncertainty of new products may expose consumers to undesirable trial-and-error costs and thus deter them from making a purchase. To mitigate such costs, manufacturers can incentivize consumers to recycle their products or offer second-hand products at lower prices. However, second-hand products may cannibalise new products, raising questions about the feasibility of adopting such a business model. Inspired by this observation, we build a game theoretic model where a manufacturer can develop two types of second-hand businesses (recycling-only or refurbishing-and-resale). We find that when consumers’ trial-and-error costs on new products are low (high), the recycling-only (refurbishing-and-resale) model can be optimal for the manufacturer. In the former case, the recycling-only model converts a portion of non-buyers into buyers and thus improves profitability. In the latter case, the refurbishing-and-resale model induces consumers with high valuations to initially purchase second-hand products and later switch to new products. Interestingly, we also identify scenarios where the manufacturer benefits from not developing any second-hand business. Our findings are validated with real-world examples. Our results provide an explanation for the diversified choices regarding whether and how to implement second-hand business in practice.