Reverse Channel Design: The Case of Competing Retailers

TLDR

The economic and environmental benefits of product remanufacturing are widely recognized, and channel profits differ between direct and indirect collection systems, with direct systems driven by scale of returns and indirect systems by competitive retailer interactions. The study investigates how a manufacturer’s choice of reverse channel—direct collection versus retailer-based collection—affects competitive retailers’ pricing strategies and the manufacturer’s trade‑offs in selecting an optimal reverse channel structure. The authors model both a direct collection system, where the manufacturer collects used products directly from consumers, and an indirect system, where retailers serve as return points, and analyze how allocation of collection to retailers influences their market behavior. They find that buy‑back payments to retailers create wholesale pricing flexibility that can be used to price‑discriminate between retailers of differing profitability.

Abstract

The economical and environmental benefits of product remanufacturing have been widely recognized in the literature and in practice. In this paper, we focus on the interaction between a manufacturer’s reverse channel choice to collect postconsumer goods and the strategic product pricing decisions in the forward channel when retailing is competitive. To this end, we model a direct product collection system, in which the manufacturer collects used products directly from the consumers (e.g., print and copy cartridges) and an indirect product collection system, in which the retailers act as product return points (e.g., single-use cameras, cellular phones). We first examine how the allocation of product collection to retailers impacts their strategic behavior in the product market, and we discuss the economic trade-offs the manufacturer faces while choosing an optimal reverse channel structure. When a direct collection system is used, channel profits are driven by the impact of scale of returns on collection effort, whereas in the indirect reverse channel, supply chain profits are driven by the competitive interaction between the retailers. Subsequently, we show that the buy-back payments transfered to the retailers for postconsumer goods provide a wholesale pricing flexibility that can be used to price discriminate between retailers of different profitability.