Revenue management in

remanufacturing under
competition, cannibalization,
and customer behavior

Nughthoh Arfawi
EURO 29th Conference, Valencia
Kurdhi
Shaunak Dabadghao July 4th, 2018
Jan Fransoo
 Remanufacturing

Nature Refurbishing

Manufactu
Materials Products Usage Waste
-ring

Reuse
Recycle Disposal

 Remanufacturing: improving the product quality and its life span.

 Many industry sectors.

References
Geetha Dissanayake and Pammi Sinha. An examination of the product development process for fashion
remanufacturing. Resources, Conservation and Recycling, 104:94–102, 2015.

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 Remanufacturing

 Benefits of remanufacturing  Large market of remanufactured product

- Average profit margin which exceeds - Many industry sector in remanufacturing
20% - 73,000 firms in U.S.
- Save 40-65% of the new product cost - Remanufacturing in U.K: $5 billion
- Savings in labor, material, and energy - The sales of remanufactured products
costs, surpass $100 billion per year.
- Shorter production lead time
- New market development opportunities
References
James D Abbey, Joseph D Blackburn, and V Daniel R Guide. Optimal pricing for new and remanufactured products. Journal
of Operations Management, 36:130–146, 2015.
Atalay Atasu. Environmentally Responsible Supply Chains. 2016.
United States International Trade Commission et al. Remanufactured goods: An overview of the US and global industries,
markets, and trade. USITC Publication, 4356:332–525, 2012.
Subrata Mitra. Models to explore remanufacturing as a competitive strategy under duopoly. Omega, 59:215–227, 2016.
V Daniel R Guide and Luk N Wassenhove. Managing product returns for remanufacturing. Production and operations
management, 10(2):142–155, 2001.
Talat S Genc and Pietro De Giovanni. Trade-in and save: A two-period closed-loop supply chain game with price and
technology dependent returns. International Journal of Production Economics, 183:514–527, 2017.

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 Cannibalization

• Cannibalization problem.
• Managers beliefs: 1 new product could be cannibalized by 4 remanufactured products.
• The existence of cannibalization: Empirical study.

References
Atalay Atasu, V Daniel R Guide, and Luk N Van Wassenhove. So what if remanufacturing cannibalizes my new product
sales? California Management Review, 52(2):56–76, 2010.
V Daniel R Guide Jr and Jiayi Li. The potential for cannibalization of new products sales by remanufactured products.
Decision Sciences, 41(3):547–572, 2010.
James D Abbey, Joseph D Blackburn, and V Daniel R Guide. Optimal pricing for new and remanufactured products. Journal
of Operations Management, 36:130–146, 2015.

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 Customer Behavior
- In most papers, demand is a linear function of price.
- A survey: customer behavior is an inverted U-shaped function.

References
Anton Ovchinnikov. Revenue and cost management for remanufactured products. Production and Operations
Management, 20(6):824–840, 2011.

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  We consider duopoly competition: different cannibalization level and customer behavior.
- Closed-form solutions for prices in the Nash equilibrium
- The effect of cannibalization, competition, and customer behavior on equilibrium
decisions.
- The effects of costs and demand parameters on equilibrium decisions and profits.
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 Model

Firm- (Low brand) Firm- (High brand)

𝑐𝑛 𝑐𝑢 𝑐𝑤 𝑐𝑛
New product Refurbished product Refurbished New product
() () products () ()

𝛼𝑢 ( 𝑝 𝑢 ) 𝛼𝑤 ( 𝑝𝑤 )
𝑚 ( 𝑝𝑢 − 𝑝 𝑤 )

High-end Low-end Low-end High-end

customers customers customers customers

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 Firm-W vs Firm-W
 High-end customers behavior: Linear switching function

 The optimization problem of firm

s.t.

 Demand and Profit Function

• Total new product demand = cannibalization coefficient
= price competition
• Total remanufactured product demand = market base of remanufac. product
= price sensitivity
=
=

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 Firm-W vs Firm-W: Optimal solution for the unconstrained problem

 A unique Nash equilibrium

• The optimal prices of the two firms

- could be different, not only depending on the total market, cannibalization level, and
total
price sensitivity of the firm but also of its competitor.
- have the same price when they have the same values of costs and demand parameters.

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 Firm-W vs Firm-W: Optimal Solution for the constrained problem

- The cost-saving define the four cases.

- A firm remanufacture all used product collected when the remanufacturing saving is sufficient
high.

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 Firm-W vs Firm-W:
Effects of costs and demand parameters on equilibrium decisions
• Effects of cannibalization coefficient (b)
Larger cannibalization level will not always increase the remanufactured product price. If
the firm has a sufficiently large market, cannibalization may decrease the price. Although it
will increase the high-end customers switching fraction, the potential gains from
remanufacturing exceed the cannibalization cost.

• Effects of price competition (m)

Greater price competition leads to smaller equilibrium decisions. In this case, the firms will
decrease their prices for keeping their market from competitor as many as possible while
maximizing profit.

• Effects of used product quantity (s)

Higher used product quantity leads a firm to decrease the remanufactured product price in
order to increase the product sales.

• Effects of
- and decrease in , l
- and increase in , , k

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 Firm-W vs Firm-W:

 Comparison between the firms’ equilibrium decisions

Having higher cost savings is not enough to charge lower price than competitor. The firm also
needs to take into account the price competition.

• If the price competition is small, then a firm with higher cost savings can charge a higher
price than its competitor. This is suitable since the potential gains from the higher
remanufacturing saving exceeds switching customers effect.
• If the price competition is high, the firm should charge a lower price for the
remanufactured product to prevent their customers from buying the competitors product.

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 Firm-W vs Firm-W:
Effects of costs and demand parameters on equilibrium profits
• Effects of cannibalization coefficient (b)

- Larger cannibalization level will not always decrease the profit. If the firm has a sufficiently large
market or high cost saving, cannibalization may increase the profit. In this case the selling of
remanufactured products becomes more profitable than that of new product.

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 Firm-W vs Firm-W:
Effects of costs and demand parameters on equilibrium profits
• Effects of price competition (m)

The effect of price competition on the profits also depends on the cannibalization level and cost
savings.
• When the firm has low cannibalization level or high cost saving, its profits increase in price
competition (m) and then decrease. When the firm has relatively large cannibalization level or low
cost saving, the profits always decrease in price competition.
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 Firm-W vs Firm-W:
Effects of costs and demand parameters on equilibrium profits

• Effects of used product quantity ()

• Higher used product quantity increase the profit of a firm when the total market base for
remanufactured product is sufficiently high.
• An increase in used product quantity of a firm will lead to decrease in the profit of its
competitor.

• Effects of , , , k, l
• and decrease in , ,
• and increase in k, q,

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 Firm-U vs Firm-W
 High-end customers behavior of firm-W:
Linear function

 High-end customers behavior of firm-U:

Inverted-U-Shaped function

maximum switching price

- If ,
- If ,

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 Firm-U vs Firm-W
Optimal Policies for the unconstrained problem

• The Nash equilibrium is

determined by and the two
thresholds on : and .
• The cost saving determine the
relationship between and .

• A unique Nash-equilibrium exists

when the cost saving is
sufficiently high ().
• Nash-equilibrium is not
guaranteed to exist when the
cost saving is sufficiently low
().

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 Firm-U vs Firm-W
Optimal Policies for the constrained problem

- The cost saving define the four cases. A firm

will remanufacture all used product collected
when the cost saving is sufficiently high.

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 Firm-U vs Firm-W:
Effects of costs and demand parameters on equilibrium decisions
• Effects of manufacturing cost

The manufacturing cost will not always decrease the remanufactured product price. In
case the maximum switching price or the price competition are sufficiently low, greater
manufacturing cost leads to greater price.
• The higher remanufacturing cost, the smaller new product profit margin.
• By increase the remanufactured product price, there is an additional amount of
product which can be sold with high remanufacturing saving.

• Effects of
- and decrease in l, m, s
- and increase in

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 Firm-U vs Firm-W:
Effects of costs and demand parameters on equilibrium decisions

• Effects of maximum switching price (

• The maximum switching price induce the firm to decrease the price when the market base
is sufficiently large. This is because the larger maximum switching price, the lower
cannibalization level. Hence, by decrease the price, this not only decrease the
cannibalization level but also attract more low-end customers.
• Maximum switching price of has an indirect effect on the price of . This causes a smaller
decrease of price of in order to reduce the lower-end customer switching effect.

• Effects of cannibalization coefficient

• The cannibalization level induce the firm to decrease the remanufactured product price if
the market base is sufficiently large. Although it will increase the high-end customers
switching fraction, the potential gains from remanufacturing exceed the cannibalization
effect.
• Higher cannibalization level leads the firm to always increase the price.
- The cannibalization level of is always lower than that of .
- By increase the remanufactured product price, there is an additional amount of product
which can be sold with high remanufacturing saving.
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 Firm-U vs Firm-W
 Comparison between the firms’ equilibrium decisions
If the maximum switching price is sufficiently high, the firm can charge the
remanufactured product at lower price than . This is because the greater , the smaller
cannibalization degree of .
 Comparison between the firms’ equilibrium profits

• There exists a threshold such that

if , .

• Firm obtains a higher profit than when

the maximum switching price is
sufficiently high.

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 Firm-U vs Firm-W:
Effects of costs and demand parameters on equilibrium profits
• Effects of used product quantity ()
• Higher used product quantity increase the profit of a firm when the total market base for
remanufactured product is sufficiently high.

• An increase in used product quantity of will lead to decrease in the profit of . Higher used
product quantity of leads the firm to decrease the price. This causes a smaller decrease of ’s
price in order to reduce the customer switching cost. It will increase the cannibaliza-tion
level. Since the used product quantity of the competitor is remaining the same, he/she
cannot sell more remanufactured product. Hence, the profit of will decrease.

• An increase in used product quantity of lead to increase in the profit of when the used
product quantity of is sufficiently low. Higher used product quantity of leads the firm to
decrease the price. This causes a smaller decrease of ’s price in order to reduce the customer
switching cost and decrease cannibalization level. The firm still can sell all remanufactured
product from other low-end customer. Hence the profit will increase.

• Effects of , , , k, l • and decrease in , ,

• and increase in k, q,

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 Conclusion
 If a firm has sufficiently large remanufactured product market or sufficient low
cost saving, the firm do not need to worry about cannibalization.

 The price competition has more impact to a firm who has higher cannibalization
level since it may increase the number of high-end customer who switch to
purchase remanufactured product from competitor. In general, an increase in
price competition is unfavorable for both firms.

 For firm , maximum switching price and cost saving drive the strategy choice;
where as for cost saving characterize the optimal pricing decision.
Firm could be more profitable than when the maximum switching price is
sufficiently high which will decrease cannibalization level.

 We have different analysis sensitivity results for some parameters between and ,
especially on manufacturing cost, cannibalization level, maximum switching
price, and used product quantity.

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 Future Research

 Incorporate stochasticity in supply of used product and demand of

remanufactured product.

 Incorporate uncertainty in remanufacturing cost or customer

behavior of competitor.

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 Thank you!

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