Article ID: | iaor201113136 |
Volume: | 20 |
Issue: | 6 |
Start Page Number: | 824 |
End Page Number: | 840 |
Publication Date: | Nov 2011 |
Journal: | Production and Operations Management |
Authors: | Ovchinnikov Anton |
Keywords: | management, cost benefit analysis, optimization, simulation, simulation: applications, economics |
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.