Revenue and Cost Management for Remanufactured Products
Production and Operations Management · 2011 · Volume 20 · Issue 6
DOI: 10.1111/j.1937-5956.2010.01214.x
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.
Keywords
behavioral operations, environmental sustainability, remanufacturing, demand cannibalization, revenue management
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