The Strategic Decentralization of Reverse Channels and Price Discrimination Through Buyback Payments

The economical and the environmental bene ̄ts of product remanufacturing have been widely recognized in the literature and in practice. In this paper, we focus on the interaction between a manufacturer's reverse channel choice to collect post-consumer goods and the strategic product pricing decisions in the forward channel when retailing is competitive. To this end, we model a centralized product collection system, where the manufacturer collects used products directly from the consumers (e.g., print and copy cartridges) and a decentralized product collection system, where the retailers act as product return points (e.g. single use cameras, cellular phones). The paper ̄rst examines how the allocation of product collection to retail outlets impacts their strategic behavior in the product market, and discusses the implication of this on the economic tradeo®s that the manufacturer balances while choosing a centralized as opposed to a decentralized product collection system. When a centralized collection system is used, it is shown that the channel pro ̄ts are driven by the cost e±ciency (i.e. scale economies ) in collection whereas, in decentralized reverse channels the pro ̄ts result from more intense competition in the product market. Secondly, we examine how the manufacturer can use the reverse channel for coordinating pricing decisions to retail markets with di®erent pro ̄tability. We show that the buyback payments transfered to the retailers for post-consumer goods provide a wholesale pricing °exibility to the manufacturer, which can be used to price discriminate between retailers of non-identical markets.