Consumers' Purchase Behavior Under Trade-In Program with Limited Promotion Period

Abstract

To analyze consumers' purchase behavior and a firm's subsidy decision and profit under a trade-in program with a limited promotion period, this work builds a baseline model assuming that consumers are myopic, followed by a two-stage model for strategic consumers as an extension. Finally, this work extends the two-stage model to a subsidy variation model and a valuation variation model. The analytical results provide the following generalizations. (i) When consumers are myopic, a firm can promote trade-in, reduce subsidy and gain more benefit through lengthening the trade-in promotion period, increasing the level of product upgrade, shortening the product life cycle, or increasing the proportion of consumers who are waiting for the first-generation products. (ii) When consumers are strategic, some of them will wait for the second-generation products only if the level of the product upgrade is above a threshold. Therein, further increasing the level of product upgrade has no influence on either consumers' purchase behavior or a firm’s subsidy decision and profit. Otherwise, strategic consumers are not distinguishable from myopic consumers. (iii) For the case of strategic consumers, a firm can also promote trade-in, reduce subsidy and gain more benefit through lengthening the trade-in promotion period, shortening the product life cycle, or increasing the proportion of consumers who are waiting for the first-generation products. (iv) Fewer consumers will participate in the trade-in program if a firm dramatically reduces trade-in subsidy or consumers' valuation of the second-generation products decreases dramatically in the delayed purchase interval.

Keywords: Trade-in Program, Limited Promotion Period; Consumers' Purchase Behavior; Products Quality; Product Life Cycle.

JEL Classification: M11, M31