Revenue and Cost Management for Remanufactured Products

Production and Operations Management, Forthcoming

Posted: 31 Jan 2009 Last revised: 21 Feb 2011

See all articles by Anton Ovchinnikov

Anton Ovchinnikov

Smith School of Business - Queen's University; INSEAD - Decision Sciences

Date Written: October 20, 2010

Abstract

This paper considers pricing and remanufacturing strategy of a firm that decides to offer both new and remanufactured versions of its product in the market and is concerned with demand cannibalization. We present a model of demand cannibalization and a behavioral study that estimates a key modeling parameter: a fraction of consumers who switch from new to remanufactured product. As we show, this fraction has an inverted-U shape, and, thus, the underlying consumer behavior cannot be modeled using the standard methodologies that rely on consumers’ willingness to pay (WTP). We find that by incorporating the inverted-U shaped consumer behavior, the firm remanufactures under broader conditions, charges a much lower price, and typically remanufactures more units - leading to an increase of profits from remanufacturing by up to a factor of two as compared with making decisions based on the WTP only. Lastly, we find that the behavior of the low-price market segment plays an important role because the firm reacts to it differently than the WTP-based logic would suggest.

Keywords: behavioral operations; environmental sustainability; remanufacturing; demand cannibalization; revenue management

Suggested Citation

Ovchinnikov, Anton, Revenue and Cost Management for Remanufactured Products (October 20, 2010). Production and Operations Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1335460

Anton Ovchinnikov (Contact Author)

Smith School of Business - Queen's University ( email )

143 Union Str. West
Kingston, ON K7L3N6
Canada

INSEAD - Decision Sciences ( email )

United States

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