Optimal remanufacturing decisions in supply chains considering consumers’ anticipated regret and power structures
Introduction
With great attention being paid to the environment and sustainable development, remanufacturing has become an important way for firms to enhance core competitiveness. The market for remanufactured products (RPs) is significantly growing. The U.S. International Trade Commission reported that the economic value of US remanufactured production was reported to be more than US$43 billion in 2012 (Shi et al., 2020). It is estimated that the value of global RPs exceeds $100 billion annually, with consumer markets representing approximately $10 billion worth of sales per year (Abbey et al., 2015). Although the availability of RPs continues to increase, many consumers are unaware of the remanufacturing processes and the derived products (Krikke et al., 2013). The consumer’s value assessment of RPs has become one of the major factors for many firms in realising the potential value of remanufacturing activities, understanding how consumers assess RPs will help manufacturers develop effective remanufacturing strategies to increase both firm and consumer value (Agrawal et al., 2015).
However, in the remanufacturing context, a firm’s marketing strategy considering consumers’ valuation behaviour has surprisingly received limited attention to date (Kovach et al., 2018). Previous publications usually assume that the valuation for RPs is a constant fraction of the consumer’s perceived value for the corresponding new products (NPs) (Ferguson and Toktay, 2006, Souza, 2013). Giovanni and Zaccour, 2019, Shekarian, 2020 think that a consumer’s willingness-to-pay (WTP) for an RP, which is a fraction of their WTP for the corresponding NP. Such assumptions imply that consumers are clear about the properties of the RPs and can accurately evaluate RP value, which means they will not have any psychological risk when making purchase decisions. However, such clarity cannot always be the case. Often consumers are uncertain about RP performance, and they regard buying an RP as a risky decision (Abbey et al., 2017, Abbey et al., 2019). Compared with NPs, uncertainty is the main feature of remanufacturing (Yanıkoğlu and Denizel, 2020). The uncertainty mainly comes from the quality of recycled products, remanufacturing process, instability of the secondary market, and lack of commercial recognition of remanufacturers (Wang et al., 2018). Also, the insufficient publicity of RP attributes (e.g., environmental attributes, durability, and function) further increases the consumers’ valuation uncertainty for RPs (Ovchinnikov, 2011). Wang and Wang et al. (2020) showed that perceived risk negatively affects the intentions of consumers to purchase RPs. However, existing research on NPs and RPs rarely incorporates perceived uncertainty on quality into consumer valuation.
The consumers’ uncertain valuations can lead them to overestimate or underestimate the future value of a product and can bias their purchase decisions (Patrick et al., 2006, Panno et al., 2015). After making a decision with uncertainty, buyers may discover that another alternative would have been preferable. This can impart a sense of loss or regret (Bell, 1982). Behavioural decision theorists have shown that regret can affect current decisions even when it is not yet experienced (Simonson, 1992). Abraham and Sheeran (2003) pointed out that anticipated regret (AR) refers to feelings of regret or upset that will follow from inaction. More recently, some studies have focused on the impact of AR on purchasing decisions in different fields, such as counterfeit luxury products (Chen et al., 2015), standard and customised products (Syam et al., 2008), upgrade technology products (Shih and Schau, 2011), products with new properties (Jiang et al., 2017), and product-line design (Zou et al., 2020). The commonality among these studies is that consumers have uncertain valuations or preferences for two types of products. Similarly, there is uncertainty about consumer valuations for RPs. AR will also affect consumer purchasing decisions between NPs and RPs. Although RPs often have a price advantage over NPs, consumers have more psychological trade-offs due to the perceived quality risk of RPs. Specifically, if a consumer buys an NP and finds that features and experiences are the same between the NP and the RP (e.g., through the feedback from friends who bought the RP), that consumer may regret wasting money and not buying a cheaper RP. Behavioural theory shows that future revenue and loss will be considered in the current decision (Simonson, 1992, Diecidue et al., 2012). Similarly, if a consumer decides to buy an RP and finds out later that the RP’s features are much lower than an NP, regret about buying an RP may arise.
The behaviour literature shows that AR affects the consumer’s buying decision by changing the subjective utilities of potential outcomes (Zeelenberg and Pieters, 2007, Ratan, 2013, Zhou et al., 2020). Moreover, in practice, enterprises also believe that AR impacts consumer purchasing decisions, so they sometimes take steps to manage their consumers’ regret sensitivity. One common strategy remanufacturers employ is to provide consumers with different warranty services or change the warranty period. For example, Xerox and Kodak are monopolistic original equipment manufacturers (OEMs) that provide the same after-sales protection for NPs and RPs to decrease the sensitivity of AR. To reduce consumer concerns about RPs, Dell provides all official products (RPs) with the same warranty service as the NPs: a warranty period of three years. Similarly, premium support can be purchased for both RPs and NPs to obtain additional warranty service1. Apple also provides the same service for its RPs and NPs2. However, Lenovo has provided different warranty service and return policy for remanufactured and new devices. The warranty service period of Lenovo RPs is shorter than for its NPs, and the returns policy does not apply to refurbished cheap laptops3. Will providing more warranty services to be beneficial to manufacturers? When is it profitable for a monopolistic firm to remind consumers that they might regret purchasing decisions? How should the firm adjust its pricing to obtain more sales and profits considering the effect of AR?
Further, due to capacity constraints or the high remanufacturing cost of used products, some OEMs are not engaged in the production and sales of RPs, and RPs typically come from third-party remanufacturers (TPRs) in the market. Hauser and Lund (2008) surveyed more than 2,000 remanufacturing companies in the United States and found that only 6% of remanufacturers were OEMs, and most of the remaining need for remanufacturing was filled by TPRs. In 2015, Apple gave Foxconn the proprietary rights to reproduce the old mobile phones and remarket them in the Chinese market.4 China’s Gree, Inc., as a leader in the air conditioning market, establishes coalitions with specialised TPRs—such as Tianjian Recycling Development Co., Ltd.—by outsourcing some of its remanufacturing operations to them5.
In addition, power structures have been often discussed in the closed supply chain management in the literature (Gao et al., 2015). In different geographical markets, OEMs and TPRs often have different power structures and have different pricing strategies, which will also affect the consumers’ expected revenues and losses (Kamigaki et al., 2017). How does AR affect the pricing strategies for the OEM and TPR in different power structures?
The perceived quality risk for remanufactured products palys an important role in pricing RPs (Abbey et al., 2019). Consumers will anticipate potential loss brought by regret and mitigate or minimise it when making current purchase decisions. Moreover, in some marketing activities, firms remind consumers of the potential future loss. Hence, several questions call for attention:
- (1)
Facing a market with uncertain RP valuations, what are the optimal pricing decisions for a monopolistic OEM? How does AR affect the NP and RP pricing strategies? When is it profitable for a monopolistic OEM to remind consumers that they might regret purchasing an NP or RP?
- (2)
Should a monopolistic OEM provide RPs to the market? If so, how does AR affect the OEM production strategies?
- (3)
When TPRs enter the market to compete with the OEM, how does AR affect the production decisions of OEMs and TPRs? What will be the impact of the different power structures of OEMs and TPRs?
- (4)
How do consumers’ valuation differences regarding RPs affect remanufacturing strategies in the monopoly and duopoly cases? How do the probabilities of uncertain valuations for RPs and cost advantage of RPs affect remanufacturing decisions?
We develop an analytical framework to address these research questions. First, we study the pricing decision of a monopolistic OEM. Compared to the scenario without AR, the existence of AR is not always detrimental to the OEM; to some degree, AR could ease inner competition to increase the OEM’s profit. The impact of AR on the OEM’s profit is nonmonotonic, and there are minimum points. The optimal production strategy of RPs for the monopolistic OEM is contingent on the sensitivity of AR and the consumers’ average valuation.
Furthermore, we study pricing decisions between the OEM and TPR, assuming different power structures. It is interesting that both the OEM and TPR have a second-mover advantage when considering AR. To understand the role of consumer behaviour in remanufacturing, we investigate the impact of consumer valuation differences on product pricing and the firms’ profits. Finally, we explore how the cost advantage of RPs affect the remanufacturing strategy, and further compare the OEM decisions and profits in the monopoly and duopoly cases by numerical examples.
The motivation for this paper stems from the growing body of empirical evidence (Abbey et al., 2017, Abbey et al., 2019, Agrawal et al., 2015, Yanıkoğlu and Denizel, 2020) showing that consumers regard buying RPs as a risky decision owing to the considerable ambiguity about the RPs’ quality level. The extant theoretical models in the closed-loop supply chain (CLSC) literature usually assume a consumer’s valuation for the corresponding RPs is a constant fraction of their valuation for NPs. However, behavioural CLSCs show that the theoretical model of consumer behaviour used in previous studies may be insufficient and cannot accurately reflect the complexity of consumer valuation (Kleber et al., 2018, Wang et al., 2018, Wang et al., 2020a). We characterise consumers’ regret behaviour caused by uncertain valuations for RPs and explore the role of regret in remanufacturing. Our finding of a fundamental link between consumer behaviour and profitability can provide new insights into managing product pricing and regret in practice.
The remainder of this paper is organised as follows. Section 2 reviews the related literature. Model formulation and assumptions are presented in Section 3. Section 4 studies the in-house remanufacturing decisions of a monopolistic OEM. Section 5 investigates remanufacturing decisions between the OEM and TPR with the same power structures, and Section 6 discusses several extensions. The last section concludes with a discussion of the contribution, managerial implications, and future research directions. All mathematical proofs are in the Appendix.
Section snippets
Literature review
In addition to the literature cited in the Introduction, this paper draws on a rich body of studies on remanufacturing strategy and consumer anticipated regret behaviour. Specifically, there are three main streams of research that closely relate to our work. The first stream focuses on closed-loop supply chain management. The second stream is related to consumers’ anticipated regret behaviour. The last stream concentrates on sale management in CLSCs.
Model formulation and assumptions
Remanufacturing is a typical multiple-period problem because old products are recycled and remanufactured only if NPs have been used. To examine the effects of AR without the distraction of initial and terminal time period effects, following the literature (Yan et al., 2015, Zou et al., 2016, Jin et al., 2017), we develop a steady-state period model, meaning that all players (the OEM in the monopoly case or the OEM and TPR in the duopoly case) use the same strategies in every period. In a
The monopolistic OEM: In-house remanufacturing
In this section, we consider the in-house remanufacturing case, where a monopolistic OEM offers NPs and RPs simultaneously. The order of decisions is as follows. The OEM forecasts consumer valuations and then decides whether to provide RPs. When choosing to implement a remanufacturing strategy, the manufacturer determines the NP and RP prices and the quantities of NPs and RPs. Given product prices, each consumer decides to buy an NP, RP, or nothing.
We analyse the scenario where consumers will
The entry of a third-party remanufacturer (TPR)
Due to capacity constraints or scale effects, some OEMs may abandon the production and sales of RPs. In such cases, the recycling and remanufacturing operations can be accomplished by TPRs (Örsdemir et al., 2014); this arrangement is used by firms such as Gree, Apple, and BMW. Hauser and Lund (2008) surveyed more than 2,000 remanufacturing companies in the United States and found that only 6% of remanufacturers were OEMs, and most of the rest were TPRs. In recent years, with the development of
Extensions
Rather than assume one particular power structure between the OEM and the TPR, as is common in the literature (usually one of the parties is the Stackelberg leader), we consider other two power structures: the OEM-led scenario where the OEM leads the game and the TPR-led scenario where the TPR is the game leader. In this section, we explore the pricing and production strategies under the OEM-led scenario and TPR-led scenario and compare the equilibrium results under three power structures.
Contribution
This is the first paper to study how consumers’ anticipated regret behaviour owing to uncertain valuations for RPs affects remanufacturing strategies. First, our study contributes to both the growing literature on behavioural CLSCs and regret to provide insights on remanufacturing strategies. Previous research on consumer evaluation behaviour only shows that consumers are uncertain about RP’s recognition from an empirical analysis perspective. The research on consumer anticipated regret
CRediT authorship contribution statement
Feng Yang: Supervision, Conceptualization, Methodology, Writing - review & editing. Manman Wang: Methodology, Formal analysis, Writing - original draft. Sheng Ang: Methodology, Formal analysis, Writing - review & editing.
Declaration of Competing Interest
The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.
Acknowledgements
This research is financially supported by grants from the National Natural Science Foundation of China (71991464/71991460, 71631006, 71921001, 71874171, and 71601173) and Fundamental Research Funds for the Central Universities (WK2040000027 and WK2040160028)
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