Trade-In Rebates for Price Discrimination and Product Recovery

39 Pages Posted: 7 Jan 2015 Last revised: 13 Apr 2016

See all articles by Vishal Agrawal

Vishal Agrawal

Georgetown University - McDonough School of Business

Mark Ferguson

University of South Carolina - Department of Management Science; Georgia Institute of Technology

Gilvan Souza

Indiana University - Kelley School of Business

Date Written: October 18, 2015

Abstract

We investigate when and how an original equipment manufacturer (OEM) should offer a trade-in rebate to recover used products, in order to achieve better price discrimination and weaken competition from third-party remanufacturers (3PRs). This paper is motivated by a major IT equipment OEM, which negotiates with customers to offer them personalized trade-in rebates to induce them to return their old products and purchase new units. The company also faces increasing competition from 3PRs. We model such a trade-in program with negotiated rebates through a generalized Nash bargaining framework. Our main research question is whether the OEM should compete with a 3PR using only a trade-in program, or by offering remanufactured products (preemptive remanufacturing), or by offering both a trade-in program and remanufactured products. In the absence of 3PRs, the OEM always prefers to offer the trade-in program compared to not offering a trade-in program. As a trade-in program also helps to restrict the supply of used products to 3PRs, one would expect that offering a trade-in program would be more attractive in the presence of a 3PR. We show, however, that the OEM may find it detrimental to offer a trade-in program when faced with competition from a 3PR. We also show that despite the fact that cores are readily available via the trade-ins, the trade-in program makes it less attractive for the OEM to remanufacture. We find that the OEM prefers to only preemptively remanufacture and not offer a trade-in program when the production cost is high. Finally, we show that offering a trade-in program may also lead to lower total environmental impact but only in the presence of remanufactured products.

Keywords: remanufacturing, trade-ins, closed-loop supply chains, price discrimination, pricing

Suggested Citation

Agrawal, Vishal and Ferguson, Mark and Souza, Gilvan, Trade-In Rebates for Price Discrimination and Product Recovery (October 18, 2015). Kelley School of Business Research Paper No. 15-11. Available at SSRN: https://ssrn.com/abstract=2546002 or http://dx.doi.org/10.2139/ssrn.2546002

Vishal Agrawal (Contact Author)

Georgetown University - McDonough School of Business ( email )

3700 O Street NW
Washington, DC 20057
United States

Mark Ferguson

University of South Carolina - Department of Management Science ( email )

United States

Georgia Institute of Technology ( email )

Atlanta, GA 30332
United States

Gilvan Souza

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

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