The Effect of Competition on Recovery Strategies

TLDR

Manufacturers often weigh remanufacturing end‑of‑life products against the risk of cannibalizing higher‑margin new sales, but third‑party remanufacturers can further erode original sales in competitive markets. This study develops models to guide manufacturers’ recovery strategies when facing external remanufacturing competition and examines when each strategy is advantageous. The authors analyze a monopolist’s new‑vs‑remanufactured product competition, identify conditions for non‑remanufacturing, quantify profit loss from external competition, and evaluate remanufacturing and preemptive collection as entry‑deterrent strategies. They find that a firm may opt to remanufacture or preemptively collect used products to deter entry, even when such actions would not be chosen under a pure monopoly.

Abstract

Manufacturers often face a choice of whether to recover the value in their end‐of‐life products through remanufacturing. In many cases, firms choose not to remanufacture, as they are (rightly) concerned that the remanufactured product will cannibalize sales of the higher‐margin new product. However, such a strategy may backfire for manufacturers operating in industries where their end‐of‐life products (cell phones, tires, computers, automotive parts, etc.) are attractive to third‐party remanufacturers, who may seriously cannibalize sales of the original manufacturer. In this paper, we develop models to support a manufacturer's recovery strategy in the face of a competitive threat on the remanufactured product market. We first analyze the competition between new and remanufactured products produced by a monopolist manufacturer and identify conditions under which the firm would choose not to remanufacture its products. We then characterize the potential profit loss due to external remanufacturing competition and analyze two entry‐deterrent strategies: remanufacturing and preemptive collection. We find that a firm may choose to remanufacture or preemptively collect its used products to deter entry, even when the firm would not have chosen to do so under a pure monopoly environment. Finally, we discuss conditions under which each strategy is more beneficial.