Upstream or Downstream: Who Should Provide Trade‐in Services in Dyadic Supply Chains?*

ABSTRACT As observed in real‐world practices, trade‐ins can be offered by either the manufacturer or the retailer. The party offering the trade‐in program faces the trade‐off between the fixed trade‐in cost incurred and the additional revenue generated. By conducting a game‐theoretic study, we analytically explore in this article the optimal choice of trade‐in provider in a dyadic supply chain with a single manufacturer and a single retailer. We show that the trade‐in models can bear a much higher manufacturing cost and induce a higher new product sale than the benchmark case without trade‐ins. It is possible that both the manufacturer and retailer prefer to undertake the trade‐in program, which would lead to a conflict; or both firms prefer to be a free rider instead of being the trade‐in provider, which would fall into a prisoner's dilemma. Moreover, the powerful manufacturer has an incentive to delegate the trade‐in service to the retailer when facing a higher fixed trade‐in cost, but the delegation option is always worse off for the retailer compared to the scenario in which the retailer provides trade‐ins by herself. We also show that the trade‐in scenarios always benefit the environment and consumers of the replacement segment, but hurt the primary segment consumers. The social welfare would actually be higher in the scenarios with trade‐ins if the fixed trade‐in cost is relatively low and the residual value of old products is relatively high.