Effects of a secondary market on original equipment manufactures’ pricing, trade-in remanufacturing, and entry decisions

As environmental regulations are becoming increasingly strict, firms are setting up remanufacturing systems and using trade-in programmes that take back used products to stimulate demand. Meanwhile, they are starting to sell remanufactured products to secondary markets to avoid the problem of cannibalization. In this study, we establish a two-period model in which a monopolistic original equipment manufacturer (OEM) offers a trade-in programme to improve sales and collect used products. At the same time, the OEM can elect to remanufacture these used products and resell them to a secondary market. The results for the static pricing case show that the two primary driving factors, customers’ maximum willingness to pay into the secondary market and production cost, produce different outcomes. Depending on the relationship between these two key factors, seven outcomes exist. Specifically, although all used products are collected and the secondary market is available, the OEM may not remanufacture or may partially remanufacture. We study the above problem using a dynamic pricing case in which the product price during the second period is different from that in the first period. We find that the OEM prefers to offer a menu such that all rather than just some holders participate in the trade-in programme. Furthermore, in the dynamic pricing case, all rather than some of these used products are remanufactured, in contrast with the static pricing case. However, the layout of the OEM's trade-in and remanufacturing policies under the static pricing case is similar to that under the dynamic pricing case. We further extend our study to include a competitive situation and find that the results for the core model can essentially be reproduced under competition.