Economic and environmental impacts of competitive remanufacturing under government financial intervention

doi:10.1016/j.cie.2021.107473

Computers & Industrial Engineering

Volume 159, September 2021, 107473

https://doi.org/10.1016/j.cie.2021.107473 Get rights and content

Highlights

•
Two identical manufacturers have the same opportunity of remanufacturing.
•
When both manufacturers invest in remanufacturing, they might have a prisoner’s dilemma.
•
The government might subsidize one manufacturer’s fixed cost of remanufacturing.
•
Government intervention benefits both the industry and the environment under certain conditions.

Abstract

Remanufacturing has long been viewed as a green strategy to increase profit, and hence its advancement has been supported by governments around the world. In this paper, two competing manufacturers have the same opportunity to establish the remanufacturing capability, and the government can subsidize one manufacturer’s fixed cost of remanufacturing. We develop a game theoretical model to investigate the economic and environmental impacts of competitive remanufacturing. In the absence of government intervention, our analysis characterizes all possible outcomes. Even for two identical manufacturers, asymmetric equilibria can arise, that is, one manufacturer carries out remanufacturing, but the other one does not. When both manufacturers are engaged in remanufacturing, they might have a Prisoner’s Dilemma in which the Pareto optimal solution is not to remanufacture. Moreover, both manufacturers might increase the new product quantities to generate more cores for profitable remanufacturing, because of which the environment is worse off. Next, we examine the impact of government intervention through a comparative analysis and identify the conditions where government intervention has positive impacts on both the industrial profit and environmental performance. These results provide a novel explanation for the use of government intervention in the remanufacturing sector.

Introduction

“Remanufacturing recovers value from used products by replacing components or reprocessing used parts to bring the product to like-new condition” (Atasu, Sarvary, & Van Wassenhove, 2008). Many managers and researchers agree that remanufacturing is where profitable business and corporate social responsibility meet. On the one hand, as a low-cost alternative to all-new manufacturing, remanufacturing can enhance the producer’s profitability, as shown in successful examples from many industries (Geyer et al., 2007, Ovchinnikov et al., 2014, Wu and Zhou, 2019). On the other hand, remanufacturing can significantly lessen the environmental impact because it consumes fewer resources and less energy than all-new manufacturing by recovering the residual value of end-of-use products (Debo, Toktay, & Van Wassenhove, 2005).

As a consequence, remanufacturing is becoming an integral part of a growing number of industries. For example, photography was revolutionized by Eastman Kodak and Fuji Photo Film with their single-use cameras, and both of them were engaged in remanufacturing (Wu & Zhou, 2017). However, competing manufacturers in the same industry might have different remanufacturing choices. For example, in the smartphone industry, Apple sells refurbished iPhones in China, while its Chinese rivals like Huawei does not (Jin, Nie, Yang, & Zhou, 2017). Our research questions naturally come out:

Section snippets

What is the driving force behind the different remanufacturing choices of competing manufacturers? And, what are the associated impacts?

The existing literature has paid great attention to competition in remanufacturing, but it is usually assumed that at most one manufacturer can perform remanufacturing. In this paper, we formulate a game-theoretical model in which two competing manufacturers have the same opportunity to capitalize on remanufacturing.

Our analysis characterizes all possible outcomes. In line with intuition, manufacturers are less likely to carry out remanufacturing as the related fixed cost increases.

What are the impacts of government intervention on competitive remanufacturing?

Our analysis shows that government intervention enhances the industry’s profitability if and only if the government can establish the remanufacturing capability in a much more cost-efficient way than the original equipment manufacturer. Otherwise, the total profit might decrease because government intervention distorts the manufacturer’s optimal remanufacturing strategy. However, such a distortion in the remanufacturing strategy could be beneficial to the environment since it fosters the

Literature review

This paper mainly builds on and contributes to the literature on competition in remanufacturing. Interested readers should refer to Abbey and Guide (2018) for a comprehensive review. The existing literature has paid great attention to the competition between original equipment manufacturers and independent remanufacturers. It starts from Majumder and Groenevelt (2001), to the best of our knowledge, which analyzes the competition between one manufacturer and one remanufacturer, and finds that

Assumptions and notation

Two ex-ante identical manufacturers, indexed by $i = 1, 2$ , produce all-new products and compete in the market. Each manufacturer can incur a fixed cost, $F$ , to establish the remanufacturing capability, and then produces remanufactured products by recovering the residual value of end-of-use products that were produced by itself. For ease of exposition, we normalize the unit remanufacturing cost to $0$ , and use the parameter $c$ to denote the unit new production cost. Note that, in this context, the value

Benchmark: No intervention

The government is assumed to be inactive in this section. We analyze the competition between two manufacturers by first solving for the equilibrium production quantities, and based on these, computing the profits of both manufacturers given the different remanufacturing capabilities. These profits are then used to identify the equilibrium remanufacturing capability investment decisions.

The impacts of government intervention

In this section, we examine the impacts of government intervention. Firstly, we derive the equilibrium decisions provided that the government subsidizes manufacturer $1$ . Secondly, the economic impacts of government intervention are revealed by comparing the total profits. Finally, the weighted production quantities are compared to show the environmental impacts of government intervention.

Conclusions

In this paper, we develop an analytical model to investigate the economic and environmental impacts of competitive remanufacturing. The conventional wisdom is that remanufacturing is a viable strategy to increase profit. In the benchmark model with no government intervention, we identify the possible peril of competitive remanufacturing. That is, it might create a Prisoner’s Dilemma to both manufacturers. If the fixed cost of remanufacturing is intermediate, remanufacturing is independently

CRediT authorship contribution statement

Jiajia Nie: Methodology, Software, Formal analysis, Writing - original draft, Visualization, Funding acquisition. Jing Liu: . Hongping Yuan: . Minyue Jin: Conceptualization, Validation, Project administration, Funding acquisition.

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.

Acknowledgments

This research work was supported by the National Natural Science Foundation of China [grant numbers 71672153, 72071020 and 71801208] and Social Science Planning Project of Chongqing [grant number 2019PY44].

References (38)

P. De Giovanni et al.
A Two-Period Game of a Closed-Loop Supply Chain
European Journal of Operational Research
(2014)
G. Ferrer et al.
Managing New and Differentiated Remanufactured Products
European Journal of Operational Research
(2010)
X. Han et al.
Optimal strategies for trade-old-for-remanufactured programs: Receptivity, durability, and subsidy
International Journal of Production Economics
(2017)
H.S. Heese et al.
Competitive Advantage through Take-Back of Used Products
European Journal of Operational Research
(2005)
X. Hong et al.
Quantity and collection decisions in a closed-loop supply chain with technology licensing
European Journal of Operational Research
(2017)
S. Mitra et al.
Competition in Remanufacturing and the Effects of Government Subsidies
International Journal of Production Economics
(2008)
Ö. Özdemir et al.
Recovery Decisions of a Producer in a Legislative Disposal Fee Environment
European Journal of Operational Research
(2012)
H. Pun et al.
The value of partnership under competition: When competitors may be R&D joint-venture and supply-chain partners for a critical component
International Journal of Production Economics
(2016)
M. Reimann et al.
Managing a Closed-loop Supply Chain with Process Innovation for Remanufacturing
European Journal of Operational Research
(2019)
W. Wang et al.
Reward-penalty mechanism for closed-loop supply chains under responsibility-sharing and different power structures
International Journal of Production Economics
(2015)

S. Webster et al.

Competitive Strategy in Remanufacturing and the Impact of Take-Back Laws

Journal of Operations Management

(2007)

C.-H. Wu

OEM product design in a price competition with remanufactured product

Omega

(2013)

X. Wu et al.

The optimal reverse channel choice under supply chain competition

European Journal of Operational Research

(2017)

X. Wu et al.

Buyer-specific versus uniform pricing in a closed-loop supply chain with third-party remanufacturing

European Journal of Operational Research

(2019)

Y. Xiong et al.

Manufacturer-remanufacturing vs supplier-remanufacturing in a closed-loop supply chain

International Journal of Production Economics

(2016)

Y. Xiong et al.

Don't Forget Your Supplier When Remanufacturing

European Journal of Operational Research

(2013)

Y. Zhou

The role of green customers under competition: A mixed blessing?

Journal of Cleaner Production

(2018)

Y. Zhou et al.

Less is More: Consumer Education in a Closed-Loop Supply Chain with Remanufacturing

Omega

(2021)

J.D. Abbey et al.

A typology of remanufacturing in closed-loop supply chains

International Journal of Production Research

(2018)

Cited by (17)

The government intervention effectiveness in promoting remanufacturing: Subsidy or remanufacturing target?
2024, Socio-Economic Planning Sciences
Rapid resource consumption and rising environmental pollution have caught worldwide attention. Recycling and remanufacturing are widely recognized as one of the effective ways to address the above issues. However, due to the lack of government regulation, the recycling and remanufacturing industry has not developed well. Therefore, our study investigates the impact of two key government policies: recycling subsidy and remanufacturing rate target. We assess their effectiveness within a supply chain consisting of a manufacturer, a retailer, and a third-party recycler. The study examines the optimal strategy for each member in five separate scenarios, discussing how these differing policies can promote remanufacturing and influence business decisions. The results show that although a financial subsidy can increase the recycling rate, this intervention might negatively impact social welfare and the environment. Surprisingly, the impact of a remanufacturing target tends to be more beneficial than subsidy strategy, even though this may result in some loss for the manufacturer’s profit. It is also noted that a combined strategy, which includes a remanufacturing target that exceeds a certain threshold, is particularly effective. Overall, this study provides a clearer understanding of how government subsidy and remanufacturing target play their part in promoting remanufacturing.
Will you stick to a high-quality collecting standard? order fulfillment vs. limited supply in diseconomy-cost-mattered remanufacturing operations
2023, Computers and Industrial Engineering
Consider a remanufacturing system consisting of a brand, a new component supplier (Supplier N), and a remanufactured component supplier (Supplier R). The brand priorly purchases remanufactured components and then assembles them into final products, while Supplier R collects the end-of-life products with random residual quality and then produces them to be “as good as new” components at a diseconomy cost based on the residual quality. Supplier R has the option to provide order fulfillment commitment before production (Scenario O), or, do not provide such a commitment, reserving the right to limit the proportion of the orders to save production costs although it may drive the brand to emergently purchase the new components (Scenario L). Specifically, in Scenario L, Supplier R can set a strict residual quality standard which saves the remanufacturing cost and constrains the brand’s order quantity. We reveal that constraining the brand’s order quantity will not be the optimal choice for Supplier R, because the overreliance on the limited-supply threat will distort Supplier R’s wholesale price decision, resulting in significant profit loss. However, the supply chain system can perform better with the quantity constraint, because it concentrates the channel power in the hands of a single decision maker, which enables the decisions made more closely to the first-best level.
Recovering and remanufacturing to fulfill EPR regulation in the presence of secondary market
2023, International Journal of Production Economics
To relieve competitive pressure from the secondary market and increase customer demand, producers may choose to recover and remanufacture used products. Extended Producer Responsibility (EPR) regulations have been formulated to alleviate the waste-disposal problem, which may also affect the development of remanufacturing industry. We investigate how EPR affects the remanufacturing decision and analyze related performance, including collection rate and producer profit. Our results demonstrate that EPR regulation is beneficial during the early development phase of remanufacturing industry and help improve the collection rate. However, our analyses also reveal that EPR may limit the producer's profits, and stringent collection targets inhibit the producer from remanufacturing. In addition, we find that high-durability used original/remanufactured products are not conducive for remanufacturing. The model is calibrated with field-collected heavy truck engine remanufacturing data. Three Model Extensions covering comprehensive regulation, duopoly competition, and recycling used original products supplement the findings.
Remanufacturing authorization strategies under consumer brand loyalty
2023, Journal of Cleaner Production
Authorization is a common strategy that original equipment manufacturers (OEMs) adopt to compete with remanufacturers. However, in a new market segment, the remanufacturing authorization strategy may encounter new options. Considering consumers with brand loyalty characteristics, we divide consumers into two categories: indifferent and brand-product-only. Furthermore, the OEM is able to cooperate with remanufacturers via two authorization strategies: unit fee and fixed fee. We developed three simultaneous game models to investigate the effect of market segmentation on optimal strategy by considering the effect of consumers’ brand loyalty characteristics: unauthorized remanufacturing (Model B), authorized remanufacturing with a unit authorization fee (Model U), and authorized remanufacturing with a fixed authorization fee (Model F). Our results show that the OEM can obtain a higher profit under a fixed authorization strategy when setting up an authorization fee at a certain threshold. We also find that the optimal authorization fee is strongly impacted by the proportion of the brand-product-only segment. Interestingly, the effect is not always positive. Moreover, OEMs will reduce authorization fees rather than increase it while the product cost increases. Our study investigates new insights about the impact of different types of authorization strategies on the OEM.
A game theoretic approach for evaluating high-water consumption manufacturing strategies under endogenous government financial subsidies
2023, Computers and Industrial Engineering
Citation Excerpt :
Zhang, Ma, and Liu (2021) found that a hybrid subsidy scheme was effective in helping reduce pollution emissions, increase output, and finally bring a three-win effect for the government, consumers and firms. In the remanufacturing sector, Nie, Liu, Yuan, and Jin (2021) examined the impact of government intervention and then identified the conditions where government intervention had positive impacts on both the profit and environmental performance. Within the water-saving framework, governments have instituted different subsidies to drive water savings in a variety of industries.
Motivated by the observed practices of the manufacturing industry and government, in this paper, the operational planning and water-saving strategies for a high-water-consumption (HWC) manufacturer are studied under endogenous government financial intervention in the form of subsidies. In particular, we formulate six multistage game models regarding the governments’ investment cost reduction and purchase price discount policies and the manufacturer’s self-saving and outsourcing-saving strategies. First, in addition to the price and production decisions, the threshold rules of water-saving strategy selection responding to a given subsidy are studied. Second, we explore the impacts of consumer environmental awareness (CEA) and the cost efficiency of water-saving innovations. Furthermore, the two subsidy schemes, namely, cost subsidy and price subsidy, are compared in terms of water-saving efforts, players’ profits and government expenditures. We find that (1) CEA has a positive influence on the players’ equilibrium solutions which are negatively impacted by cost efficiency. (2) The introduction of subsidy policies facilitates the outsourcing of water-saving services instead of self-saving, and the environmental, financial and social objectives of game players can be concurrently fulfilled by using a subsidy mechanism. (3) With respect to the self-saving mode, the price subsidy performs better at the water-saving level, which is opposite to that under the cost subsidy. (4) We also find that the manufacturer’s free riding behavior under the price subsidy brings about a higher quantity of supply and more benefits while maintaining a high price, which leads to a heavier financial burden for the government. Despite the possibility of higher consumption and financial spending, the consumer subsidy still generates higher social welfare.
Blockchain adoption and channel selection strategies in a competitive remanufacturing supply chain
2023, Computers and Industrial Engineering
Citation Excerpt :
In addition, Huang et al. (2019) examined the competition between a TPR and an OEM under cost information sharing. Nie et al. (2021) built a game theoretical model to investigate the economic and environmental impacts of competitive remanufacturing. Sun et al. (2020) considered a differentiation competition between the new and remanufactured products.
Environmental protection and economic benefits have attracted original equipment manufacturers (OEMs) and third-party remanufacturers (TPRs) enter into the remanufacturing industry. Considering that consumers have a low willingness to pay for remanufactured products, OEMs tend to apply blockchain technology to disclose more product information to consumers to improve their purchase intention. Along this line, we investigate a supply chain consisting of an OEM, a TPR and a retailer, and examine four models depending on whether the OEM adopts blockchain technology or not, and whether the OEM sells products directly to consumers (direct channel) or indirectly by the retailer (retail channel). In this paper, a Stackelberg game is formulated to obtain the optimal strategies for blockchain technology adoption and distribution channel selection. Analytical results show that the OEM should adopt blockchain technology only when consumers’ value discount for remanufactured products produced by the OEM is high and the unit cost of adopting blockchain technology is not high under both direct and retail channels. In specific situation, the direct channel is always advantageous to the OEM whether or not blockchain technology is adopted. In addition, when consumers’ value discount for remanufactured products is not low and the unit cost of adopting blockchain technology is not high, blockchain technology adoption is beneficial to the environment under both direct and retail channels.

View all citing articles on Scopus

View full text