Dynamic pricing of remanufacturable products under demand substitution: a product life cycle model

We consider a manufacturer who sells both the new and remanufactured versions of a product over its life cycle. The manufacturer’s profit depends crucially on her ability to synchronize product returns with the sales of the remanufactured product. This gives rise to a challenging dynamic optimization problem where the size of both the market and the user pool are dynamic and their current values depend on the entire history. We provide an analytical characterization of the manufacturer’s optimal pricing, production, and inventory policies which lead to a practical threshold policy with a small optimality gap. In addition, our analysis offers a number of interesting insights. First, the timing of remanufacturing activity and its co-occurrence with new product manufacturing critically depends on remanufacturing cost benefits, attractiveness of the remanufactured product and product return rate. Second, there is a small upward jump in the price of the new product when remanufacturing is introduced. Third, the manufacturer keeps the new product longer on the market as the cost of remanufacturing decreases. Fourth, partially satisfying demand for the remanufactured item is never optimal, i.e., it is satisfied either fully or not at all. Finally, user pool and inventory of returned products are substitutes in ensuring the supply for future remanufacturing. The authors thank E.R. Cil and M.H. Tongarlak for their technical assistance. Electronic supplementary material The online version of this article (doi:10.1007/s10479-013-1409-1) contains supplementary material, which is available to authorized users. M. Akan Tepper School of Business, Carnegie-Mellon University, 5000 Forbes Ave., Posner Hall, Pittsburgh, PA 15213, USA e-mail: [email protected] B. Ata (!) Booth School of Business, University of Chicago, 5807 S. Woodlawn Ave., Chicago, IL 60837, USA e-mail: [email protected] R.C. Savaşkan-Ebert Cox School of Business, Southern Methodist University, 6212 Bishop Blvd., Dallas, TX 75275-0333, USA e-mail: [email protected]