Optimal trade-in and refurbishment strategies for durable goods

Many manufacturers in the automobile industry accommodate the huge number of used cars by offering trade-in programs. In addition, some manufacturers have begun considering product refurbishment, a policy that is widely adopted in the electronics industry. Therefore, we are motivated to explore the reasons behind different practices in the automobile industry. We propose an analytical framework to identify when a manufacturer facing strategic consumers should offer trade-in (and refurbishment) programs. For that purpose, we analyze and compare the results of three models: no program, trade-in program only, and trade-in and refurbishment programs. This study establishes that the manufacturer can always increase his profit by improving the quality of new products and reducing the quality depreciation rate. Yet when the manufacturer does not (resp., does) offer a refurbishment program, his profit must (resp., need not) decrease with any increase in the production cost of new products. Finally, the manufacturer prefers to offer (a) trade-in programs only when the production cost of new products is low, (b) both trade-in and refurbishment programs when that cost is moderate, and (c) neither program when the cost to produce new products is high. Our numerical study reveals more management implications for the manufacturer's preferred decision.