Optimal pricing and core acquisition strategy for a hybrid manufacturing/remanufacturing system

Abstract

Remanufacturing is one of the product recovery options where the quality of used products (cores) is upgraded to ‘as-good-as-new’ conditions. In this article, we consider a monopolist firm selling new and remanufactured products to quality-conscious primary customers and price-sensitive secondary customers, respectively, with one-way substitution, i.e. some primary customers may substitute new products by remanufactured products while secondary customers can never afford to buy new products. We develop economic models under two scenarios – when the supply of cores is unconstrained and when manufacturers have to procure cores at an acquisition price. The major observations of the article are as follows. A firm is better off when there is no constraint on the supply of cores. Even when cores have to be acquired at an acquisition price, the profitability is higher than that when the firm does not engage in remanufacturing activities. When a larger number of primary customers replace new products with remanufactured products, there is partial cannibalization of new product sales; however, the combined market share and profitability of the firm increase. When core supply is constrained and customers are less sensitive to core prices, the limited supply of cores may render remanufacturing an infeasible option for the firm. Therefore, firms should not only generate awareness among primary customers to buy remanufactured products, but also step up efforts to ensure a steady supply of cores. We conclude the article with managerial implications and directions for future research.

Keywords:

• pricing
• remanufacturing
• core acquisition
• hybrid system
• one-way substitution

Acknowledgement

The author is grateful to the Editors and five anonymous reviewers for their valuable comments and suggestions that helped improve the original paper to a significant extent. The author would also like to acknowledge the helpful discussions with Professor Arijit Sen, Professor of Economics at Indian Institute of Management Calcutta on the subject area of research.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. In this article, we do not include fixed costs for manufacturing or remanufacturing. While fixed costs for manufacturing are always incurred, fixed costs for remanufacturing are relevant when the manufacturer decides to remanufacture. Therefore, we assume that either there are negligible fixed costs for remanufacturing or that the manufacturer decides to remanufacture only when the additional profits from remanufacturing exceed fixed and overhead costs for remanufacturing (Majumder and Groenevelt 2001; Atasu, Sarvary, and Van Wassenhove 2008; McGuire and Staelin 2008).