The role of second-hand markets in circular business: a simple model for leasing versus selling consumer products

Abstract

This paper explores the role of the second-hand market when transitioning to a closed-loop system where products are leased multiple times. The total cost of ownership for consumers and profitability for manufacturers are compared in circular and linear business cases. We find that while second-hand markets were beneficial for manufacturers of durable goods in a linear system, since they increased the consumers’ willingness-to-pay for new products, the same second-hand markets might restrict the profitability of a closed-loop business model. A high resale value results in a relatively low cost of ownership in the sales system and additional activities in the closed-loop model (such as managing the lease contracts and refurbishment) add significant costs to the supply chain. Consequently, the economic (and environmental) benefits of leasing products already traded on second-hand markets in the linear system are often limited. Our simple analytical model allows a quick and dirty analysis of multiple scenarios with a minimum of inputs. We argue that manufacturers lack these kinds of models to guide them in navigating circular economy business models.

Keywords:

• circular economy
• closed-loop supply chains
• total cost of ownership
• profitability
• remanufacturing

Notes

1. Leasing is mentioned as a mechanism to obtain product returns needed for refurbishment (Souza 2013) as well as a strategy to control second-hand markets (Waldman 1997). We therefore focus on leasing as an alternative business model suitable for the circular economy.

2. While the company could take legal action against delinquent consumers, it may be hard (and expensive) to do so for products like strollers.

3. While there may not be a large number of delinquent consumers it is wise to analyse their effect, especially if chasing them is difficult and costly.