Intertemporal Product Management with Strategic Consumers: The Value of Defective Product Returns

Manufacturing & Service Operations Management

64 Pages Posted: 19 Oct 2014 Last revised: 23 Dec 2020

See all articles by Narendra Singh

Narendra Singh

Nazarbayev University - Graduate School of Business

Karthik Ramachandran

Georgia Institute of Technology - Scheller College of Business

Ravi Subramanian

Georgia Institute of Technology - Scheller College of Business

Date Written: December 10, 2020

Abstract


(1) Problem Definition: An increased incidence of quality issues, resulting in defective product returns (DPRs), is a concern for firms bringing innovative products to market. While a firm can recover value from DPRs through refurbishing, consumers are known to act strategically in anticipation of the future availability of refurbished units. We study a firm's strategy for offering a new product and refurbished DPRs to strategic consumers across time.

(2) Academic/Practical Relevance: Aided by emerging shopping tools, an increasing number of consumers consider buying refurbished versions of products rather than their new counterparts. A novel contribution of our work is the recognition of the refurbishing of DPRs as a possible solution to the time inconsistency problem that arises when a firm offers products to strategic consumers across time. We characterize how the product line decisions and profit of the firm are influenced by the defect rate, the perceived quality of refurbished DPRs, and consumers’ hassle cost of returns.

(3) Methodology: We develop a two-period game-theoretic model to characterize the firm offering the new product and refurbished DPRs to strategic consumers across time.

(4) Results: The refurbishing of DPRs helps the firm implicitly commit to limiting the quantity of the new product offered in the future, allowing the firm to charge a premium for the new product today. As a result, firm profit may even increase with the defect rate. These results persist across various model extensions.

(5) Managerial Implications: Whereas the firm's profit is the highest when there are no defects, opportunities to achieve marginal reductions in defect rates may not be worth the investment, and may even be counterproductive. Also, efforts towards enhancing the perceived quality of the refurbished product or decreasing the hassle cost for consumers may better serve the firm than efforts towards marginally improving defect rates.

Keywords: defective product returns (DPRs); refurbishing; strategic consumers; time inconsistency

Suggested Citation

Singh, Narendra and Ramachandran, Karthik and Subramanian, Ravi, Intertemporal Product Management with Strategic Consumers: The Value of Defective Product Returns (December 10, 2020). Manufacturing & Service Operations Management, Available at SSRN: https://ssrn.com/abstract=2511424 or http://dx.doi.org/10.2139/ssrn.2511424

Narendra Singh

Nazarbayev University - Graduate School of Business ( email )

53 Kabanbay Batyr Ave
Nur-Sultan, 010000
Kazakhstan

HOME PAGE: http://https://gsb.nu.edu.kz/faculty-profiles/narendra-singh-5/

Karthik Ramachandran (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
(404) 894-8631 (Phone)

HOME PAGE: http://https://sites.gatech.edu/karthikr/

Ravi Subramanian

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

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