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Keywords:

  • warranty;
  • upgrade action;
  • sale price;
  • second-hand product

To attract more consumers and increase the number of sales, dealers need to determine optimal marketing strategies (such as warranty policy and sale price) and engineering decisions (such as upgrade and maintenance strategies) for their second-hand products. Applying an upgrade action to a second-hand item adds up to the sale price, but it improves the product reliability and can reduce the warranty servicing cost. In this paper, a three-parameter optimization model is developed to determine the optimal upgrade strategy, warranty policy and sale price of a second-hand product to maximize the dealer's expected profit. We provide a numerical study to illustrate our results. Also, a sensitivity analysis is conducted to evaluate the effect of model parameters on the optimal solution. Copyright © 2012 John Wiley & Sons, Ltd.