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. � 2015 Taylor & Francis.