Revenue and Cost Management for Remanufactured Products

This paper studies joint pricing and remanufacturing strategy of a firm that decides to offer both new and remanufactured versions of its product in the market. In making this decision, the firm balances the additional revenue from selling remanufactured products, the demand cannibalization of new product sales, and the cost of remanufacturing. We present the model of the firm’s decisions and complement it with a study of consumer behavior regarding the choice between new and remanufactured products. Our model does not rely on knowing consumers’ willingness to pay (WTP), but rather on knowing the fraction of consumers who switch from the new to the remanufactured product. In the behavioral study, we find that the switching fraction has an inverted U-shape, and thus, the underlying consumer behavior cannot be modeled using the WTP approach. Combining theoretical and behavioral results, we find that the firm follows one of three strategies – remanufacture nothing, remanufacture everything, or resell falsely returned products. We characterize the optimality conditions for each strategy and relate them to the underlying product and market parameters (consumer behavior, price, demand elasticity, and others). We find that the firm that incorporates the inverted-U-shaped consumer behavior in its pricing and remanufacturing strategy could be receiving the incremental profit from remanufacturing that is up to two times higher than the firm that makes its decisions based on the WTP only. This happens because with the inverted-U, the firm remanufactures under broader conditions, charges a much lower price, and typically remanufactures more units. The latter suggests that a better understanding of consumer behavior has the potential, in addition to increasing profits, to benefit the environment by diverting more items from the waste stream. Lastly, we find that the size of the low-price market segment plays an important role because the firm reacts to it differently than the WTP-based logic would suggest.