Trade-In Remanufacturing, Strategic Customer Behavior, and Government Subsidies

Trade-in remanufacturing is a commonly adopted business practice under which firms collect used products for remanufacturing by allowing repeat customers to trade in used products for upgraded ones at a discount price. This paper studies how customer purchasing behavior and remanufacturing efficiency affect the economic and environmental values of such a business practice. We demonstrate a new benefit of trade-in remanufacturing: It helps exploit the forward-looking behavior of strategic customers, which could be much more significant than the widely recognized revenue-generating and environmental benefits of remanufacturing. High remanufacturing efficiency does not necessarily benefit a firm. With overly high remanufacturing efficiency, product durability is so high that repeat customers are reluctant to trade in and upgrade their used products. When customers are highly strategic, trade-in remanufacturing creates a tension between profitability and sustainability: On one hand, by exploiting the intensive forward-looking customer behavior, trade-in remanufacturing is quite valuable to the firm; on the other hand, with highly strategic customers, trade-in remanufacturing has a substantial negative impact on the environment and social welfare, since it may induce significantly higher production quantities without improving customer surplus. With nearly-myopic customers, however, trade-in remanufacturing benefits both the firm and the environment. Therefore, understanding the interactions between customer purchasing behavior and trade-in remanufacturing is important to both firms and policy-makers. Finally, to resolve the above tension, we study how a social planner (e.g., government) should design a public policy to maximize social welfare. The social optimum can be achieved by using a simple linear subsidy/tax scheme for both new production and remanufacturing. The proposed policy can also induce the firm to set the socially optimal remanufacturing efficiency.