The Effect of Competition on Recovery Strategies (ed.1)

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Ferguson, Mark E.
Toktay, L. Beril
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Manufacturers often face a choice of whether to recover the value in their end-of-life products through remanufacturing. In many cases, firms choose not to remanufacture, as they are (rightly) concerned that the remanufactured product will cannibalize sales of the higher-margin new product. However, such a strategy may backfire for manufacturers operating in industries where their end-of-life products (cell phones, tires, computers, automotive parts, etc) are attractive to third-party remanufacturers, who may seriously cannibalize sales of the original manufacturer. In this paper, we develop models to support a manufacturer's recovery strategy in the face of a competitive threat on the remanufactured product market. We first model the competition between new and remanufactured products produced by the same firm. The average cost to collect/remanufacture is modelled as an increasing function of the quantity collected/ remanufactured, thus capturing a unique aspect of the remanufacturing industry that has not been explored in previous market segmentation research. Our findings provide firms with conditions where the revenue increase from remanufacturing exceeds the detrimental effect of cannibalization. We then characterize the potential profit loss due to external remanufacturing competition and analyze two entry-deterrent strategies: remanufacturing and preemptive collection. We find that a firm may choose to remanufacture or preemptively collect its used products to deter entry, even when the firm would not have chosen to do so under a pure monopoly environment. Finally, we characterize conditions under which each strategy is more beneficial.
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