Production, Manufacturing, Transportation and Logistics
Two-sided competition with vertical differentiation in both acquisition and sales in remanufacturing

https://doi.org/10.1016/j.ejor.2020.01.012Get rights and content

Highlights

  • We study differentiated competition in acquisition and sales in remanufacturing.

  • The firm with a market advantage can preempt the firm with an acquisition advantage.

  • The firm with acquisition advantage cannot preempt the firm with a market advantage.

Abstract

We study the competition between two remanufacturers in the acquisition of used products and the sales of remanufactured products. One firm has a market advantage; we consider two separate cases where either firm could have an acquisition advantage. The problem is formulated as a simultaneous game on a market that is vertically differentiated in both acquisition and sales, where both firms decide on their respective acquisition prices for used products, and selling prices for remanufactured products. A key finding is that a market advantage is significantly more powerful than an acquisition advantage. The firm with a market advantage can preempt the entry of the other firm, even if that firm has a significant acquisition advantage, but not the other way around. This is accomplished through an aggressive acquisition strategy, where the firm with a market advantage sets significantly higher acquisition prices.

Introduction

In this paper, we analytically study two-sided competition between two remanufacturers. They compete on the sales of remanufactured products, and also on the acquisition of used products, which are the input for remanufacturing, by setting their respective acquisition and selling prices. The novelty here, as we elaborate on later, is that the two firms are vertically differentiated, on both sales of remanufactured products (i.e., all consumers prefer firm 1 over firm 2 at the same selling price), as well as on acquisition (i.e., all consumers prefer selling their used product to one firm over the other, at the same acquisition price). This problem is motivated by the electronics remanufacturing industry, such as cell phones and tablets, as we elaborate on below, but its insights might apply to other industries where firms compete for sales of remanufactured products and acquisition of used products, such as automotive parts. We analytically provide a key insight: for a firm, having an advantage in sales is much more important than having an advantage in the acquisition. That is, the firm with a market advantage can preempt the firm with an acquisition advantage, but not the other way around.

Consider cell phone remanufacturing as a motivating example. Remanufacturing (or refurbishing) of used cell phones, not of the most current generation, is performed by different independent remanufacturers (IRs) and even some original equipment manufacturers (OEMs). In this paper, we use the terms remanufacturing and refurbishing interchangeably. Firms acquire used phones from sellers (existing consumers) through direct purchasing via online and other channels (e.g., www.gazelle.com), or through a trade-in program, and acquisition prices for a specific model vary depending on the buying firm and channel; hence consumers have choices when selling their used phone, with some being more convenient than others. Likewise, a more price-sensitive consumer interested in buying a refurbished phone has access to different sellers (e.g., Gazelle, third-party sellers on sites such as Best Buy, Amazon, and eBay), some of which could be authorized by the OEM, and possibly have a market advantage (Subramanian & Subramanyam, 2012), that is, they are able to command a higher selling price.

In our model, firm 1, without loss of generality, has a market advantage—consumers have a higher willingness-to-pay for firm 1’s remanufactured product than for firm 2’s product. On the acquisition side, we consider both cases: where firm 2 has an advantage or a disadvantage on acquisition—sellers prefer selling to one firm over the other at the same acquisition price. Given this setting, how should the two firms compete with one another in such two-sided competition? In particular, our research question is:

How should two vertically differentiated remanufacturers compete in both product acquisition and sales of remanufactured products, in terms of acquisition and sales prices? Can remanufacturer 1, with a market advantage, preempt a remanufacturer with an acquisition advantage, when they also compete on the acquisition of used products? If so, under which conditions?

Two key findings in our paper are as follows. First, a market demand advantage is necessary to preempt the other player, that is, the remanufacturer with an acquisition advantage cannot preempt the remanufacturer with a market advantage, even if the acquisition advantage is very significant. Second, the firm with a market advantage can preempt the remanufacturer with an acquisition advantage. This occurs when remanufacturing is most attractive: when unit remanufacturing costs (excluding product acquisition costs) are low, and consumers have low residual values for their used products (which implies used product acquisition cost is low). Under those conditions, the remanufacturer with a market advantage employs a strategy we refer to as aggressive acquisition, whereby it offers significantly higher acquisition prices than the other firm, thus acquiring all available used products. With its market advantage and the low remanufacturing cost, it can charge a price for the remanufactured product such that it can still make a positive profit on each unit sold, whereas the other firm cannot compete profitably. These findings are also highlighted in a comprehensive numerical study, designed to be symmetrical concerning the relative advantage of each player. In this study, the remanufacturer with a market advantage can preempt the other firm in 65% of instances, and in the cases where the other remanufacturer is able to compete, the profit of the remanufacturer with a market advantage is more than double, on average, than the other firm’s profit.

Section snippets

Literature Review

Within the vast CLSC literature (see, e.g. Souza, 2013, for a review), we review here three streams of literature more closely related to this research: differentiated competition in remanufacturing, product acquisition (including competition in acquisition), and competition in both product acquisition and remanufacturing sales.

Differentiated competition in remanufacturing: Such competition is analyzed in Majumder and Groenevelt (2001), Ferguson and Toktay (2006), Ferrer and Swaminathan (2006),

Model

We consider a market where two firms, which we refer to as independent remanufacturers (IRs), compete, each with their own remanufactured version of an OEM’s product. We do not explicitly model the OEM’s original new product, and instead focus solely on the competition between the two IRs, to ensure a tractable model and for parsimony. In other words, we consider the case where the OEM’s new product does not directly compete with the remanufactured products by the two IRs, perhaps because they

Characterization of equilibria

We find that neither firm ever acquires excessive cores, i.e., qaj=qrj,j{1,2} always holds. This result is mostly driven by the assumption that there is no salvage value for products that are collected but not remanufactured. We relax this assumption in Appendix C, where we show that the key insights of our paper (Proposition 1 and Observation 1 below) hold under a positive salvage value for non-remanufactured returns, despite the fact that the equilibrium structure is much more complex. The

Analysis: IR1 also has a collection advantage (β > 1)

We now consider the case where IR1 also has a collection advantage (β > 1), in addition to its market advantage. In this case, a seller of type ϕ, that is, one with WTS ϕ to IR1, has WTS βϕ to IR2, where β > 1. This collection advantage enables IR1 to set an acquisition price lower than IR2, and so pa1 ≤ pa2. Referring back to the market segmentation in the acquisition of Fig. 1, the segmentation changes in that sellers with WTS ϕ between 0 and pa2pa1β1 now sell to IR2, and hence the number

Numerical study

In this section, we provide the results of a numerical study, whose main objective is to show the impact of the key parameters a, ϵ, cr, β, and γ on the magnitude of profits for the two players. This allows us to highlight the most critical parameters, and hence provide insights into where firms should invest their resources. For example, would an improvement in relative WTP γ for IR2 result in higher gains relative to a corresponding increase in relative WTS β? Is reducing cr more important

Conclusion

In this paper, we have studied the two-sided competition between two differentiated firms in both the acquisition of used products and sales of remanufactured products. This problem is common in several industries, in particular in the mobile phone industry. In our model, we denote the player with a market advantage as IR1. On the acquisition side, we consider the cases where either player has an advantage.

The key finding in our paper is that a market advantage is much more critical than an

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