Revenue and Cost Management for Remanufactured Products

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Abstract

This paper considers pricing and remanufacturing strategy of a firm that decides to offer both new and remanufactured versions of its product in the market and is concerned with demand cannibalization. We present a model of demand cannibalization and a behavioral study that estimates a key modeling parameter: a fraction of consumers who switch from new to remanufactured product. As we show, this fraction has an inverted-U shape, and, thus, the underlying consumer behavior cannot be modeled using the standard methodologies that rely on consumers' willingness to pay (WTP). We find that by incorporating the inverted-U-shaped consumer behavior, the firm remanufactures under broader conditions, charges a much lower price, and typically remanufactures more units—leading to an increase of profits from remanufacturing by up to a factor of two as compared with making decisions based on the WTP only. Lastly, we find that the behavior of the low-price market segment plays an important role because the firm reacts to it differently than the WTP-based logic would suggest.

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