Omega 41 (2013) 287–298

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OEM product design in a price competition with remanufactured product

Cheng-Han Wu n

Department of Industrial Engineering and Management, National Yunlin University of Science and Technology, Yunlin, Taiwan, ROC

a r t i c l e i n f o

Article history:

Received 9 October 2011

Accepted 23 April 2012

This manuscript was processed by

Associate Editor Adenso-Diaz

as a degree to which the product can be disassembled without force, and thus an increasing degree of

interchangeability would decrease the OEM’s production cost, but it would also lower a remanufac-

Available online 17 May 2012

Keywords:

Product design

Pricing

Remanufacturing

Game theory

Green supply chain

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x.doi.org/10.1016/j.omega.2012.04.004

þ886 5 5342601; fax: þ886 5 5312073.

ail address: wuchan@yuntech.edu.tw

a b s t r a c t

An original equipment manufacturer (OEM) produces new products and often faces a dilemma when

determining the level of interchangeability in its product design. The interchangeability is considered

turer’s cost in cannibalizing used items. Decreasing the level of interchangeability to deter the

remanufacturer, on the other hand, would simultaneously increase the production costs of the OEM.

We thus formulate a two-period supply chain model consisting of two chain members, an OEM and a

remanufacturer, to investigate the product design decision of the OEM and both chain members’

competitive pricing strategies. We then characterize the equilibrium decisions and profits with regard

to costs and consumers’ preference for the remanufactured product. We also evaluate a strategic game

in which the OEM chooses the degree of interchangeability, and the remanufacturer determines its

collection strategy. We find that the product-design strategy is effective for the OEM in competing with

the remanufacturer, but it is not necessarily harmful to the remanufacturer.

& 2012 Elsevier Ltd. All rights reserved.

1. Introduction

Remanufacturers are motivated by the prospect of obtainingeconomic benefits to go into the business of processing andselling remanufactured products. These remanufactured productsare made from products that were initially produced by originalequipment manufacturers (OEMs) but were collected and canni-balized for reuse after they had reached the end of their usefullives. Remanufacturing systems reduce production costs andplace less of a burden on the environment because they requireless raw materials and less expensive production processes. Asdefined by Ijomah et al. [1], remanufacturing is a process ofrestoring a used product to like-new condition by rebuilding it,replacing certain components, and providing a warranty for theremanufactured product that is at least as good as the warrantyfor a new product. Thus, remanufactured products meet thedemand of consumers who desire low-priced, environmentallyfriendly products that have like-new quality. The profitability ofremanufacturing has resulted in accelerated growth in the rema-nufacturing industry. An important contributing factor is the highinterchangeability found in the design of many remanufacturedproducts [2], such as automotive parts [3], personal computers,cameras, mobile phones [4], and toner cartridges [5]. It is difficultand costly to restore used items that were not designed for

ll rights reserved.

remanufacturing [6,7]. An interchangeable design may involvedifferent design features, such as design for modularity or designfor disassembly. In this paper, we focus on interchangeabilityrelating to the degree to which the product can be disassembledwithout force [8], which affects the ease of cannibalization.

A design which allows for interchangeability may be beneficialfor OEMs because it also allows for ease of inspection, handling,and cleaning [9]. Thus, an interchangeable design would seem tobe a ‘‘win–win’’ strategy if the OEMs and remanufacturers werenot in direct competition with each other. When OEMs andremanufacturers are in competition with each other, however,some OEMs may adjust their strategies by decreasing designinterchangeability to maintain their profits. In the printer-car-tridge industry, for example, a Gartner report [10] indicates thatprinter OEMs are losing their revenues, which may exceed $13billion in 2010, because of the competition of low-cost remanu-factured products. The substantial threat that is posed by rema-nufactured products is causing certain OEMs to reconsider theirown strategies by also selling remanufactured products, but mostOEMs still do not remanufacture their products. Ferguson [11]suggested that most OEMs may be unwilling to handle remanu-factured products because they focus most of their time andresources on their new product sales, or because they lack theinfrastructure and expertise to collect and remanufacture usedunits profitably. For example, Hewlett-Packard declared its policyto produce only single-use print cartridges and not to offerremanufactured cartridges [12]. Furthermore, certain printerOEMs try to deter remanufacturers with an ultrasonic welding

C.-H. Wu / Omega 41 (2013) 287–298288

technique or unnecessary adhesive tape in the assembly processto reduce the interchangeability of used cartridges [5]. Twocartridge remanufacturing associations in Europe, UKCRA (TheUK Cartridge Remanufacturers Association) and ETIRA (EuropeanToner & Inkjet Remanufacturers Association), explained several ofthe approaches that printer OEMs use in assembling products(e.g., a sonic welding technique or unnecessary adhesive tape) todeter remanufacturing. This phenomenon also occurs in otherindustries [5,13]. A product’s design interchangeability and theavailability of used items also influence the decisions of OEMs andremanufacturers regarding prices. For these reasons, an investiga-tion of the level of interchangeability that OEMs choose to acceptin their product designs, and of the collection strategies adoptedby remanufacturers when they compete primarily based on price,may provide interesting insights.

The literature on remanufacturing has concentrated primarilyon the market segmentation between OEMs and the competingremanufacturers (see, for example, [14–24]). For example,Majumder and Groenevelt [20] examined how a remanufactureris constrained by the availability of used items when it collectsused items that were sold by an OEM in the first period and usesthe remanufactured products to compete with the OEM in thesecond period. Ferrer and Swaminathan [17,18] also examinedthe relationship between new and remanufactured products intheir investigation of competition in monopoly and duopolyenvironments under finite- and infinite-horizon models. On thisbasis, they characterized the OEM’s equilibrium results andremanufacturer’s collection decisions. The entry of a remanufac-turer into a market has generally been found to hurt the profit-ability of the OEM. Therefore, several studies have discussed howthe strategic choices of OEMs affect remanufacturers’ decisions,including their entry choices. For instance, Debo et al. [15]focused on the influence of the OEM’s choice of product technol-ogy on the level of remanufacturability and on the chain mem-bers’ profits in an infinite-horizon setting. Debo et al. [19] furtherconsidered how an OEM can choose to collect used productspreemptively to deter the entry of the remanufacturer. Theseauthors also identified the cost conditions under which thepreemptive-collection strategy would be profitable for an OEM.

Compared to OEMs, remanufacturers could potentially enjoysavings in terms of both material costs and process costs. How-ever, the manufacturers’ actual savings are substantially affectedby the interdependent product-design decisions and marketingchoices of the OEMs [25]. Product-design decisions includeoperational choices, such as level of interchangeability. A decisionto use modular designs may cause returned products to have agreater salvageable value because they can easily be dismantledand reused [26]. Modular designs also result in a higher degree ofinterchangeability [27,28] and may facilitate commonality andeconomies of scale, thereby lowering the cost of assembly [29,25]while decreasing the inventory quantities of components. Huaet al. [30] discussed the effect of the product-design strategy onthe remanufacturer’s quality and price decisions for the low-endand high-end segments of the market. The study by Hua et al.captured the effect of product design on the interaction amongdecisions by the supply chain members. Maukhopadhyay andSetoputro [26] proposed the use of a modular design as a viablestrategy to retain a high salvageable value for returned productsbecause products that embody modular designs are easily dis-mantled and reused, leading to a smaller value reduction. Otherstudies [27,28] indicated that the interchangeability of the pro-duct design also creates cost savings during production becausethe cost of assembly is reduced and economies of scale are moreeasily achieved. However, these studies on the advantages ofinterchangeability only focused on certain issues (e.g., qualityimprovement, production cost savings, reuse of return items), and

they neglected the impact of product design on pricing decisions.By applying qualitative data analysis methods, several studieshave shown that product design is an important factor forremanufacturing (e.g., [2,6,13,31,32]). For example, Gray andCharter [13] to recent developments in remanufacturing andconcluded that a good product design enables firms to resolveinefficiencies in remanufacturing and increase their own profitmargins. Ijomah et al. [33] explained that welding and strong-adhesive design types in assembly increase the difficulty ofremanufacturing. With respect to strategy in remanufacturing,Teunter [34] discussed the disassembly and recovery strategythrough a stochastic dynamic programming algorithm. However,to the best of our knowledge, no study on remanufacturing hasyet modeled the interaction between the pricing decisions ofchain members and the level of interchangeability chosen by theOEMs in their product design that affects the chain members’production costs. To address this gap in the literature, weconsider the level of interchangeability chosen by OEMs withina competitive environment under a two-period horizon.

The remainder of this paper is organized as follows. In Section 2,we derive the market demand of the new and remanufacturedproducts from the utility functions of consumers, and formulate thefirms’ profit functions. Then, we solve for the equilibrium decisionsin the presence and absence of product-design strategy. Section 3analyzes the equilibrium decisions and the product-design effects. InSection 4, we further analyze the equilibrium profits, and develop astrategic game to study the interaction between the OEM’s choice ofproduct design and the remanufacturer’s choice of collection. Thefinal section concludes the study with a brief summary and points topotential future research directions.

2. The model

We consider a supply chain consisting of two chain membersover two periods: in the first period, an OEM chooses the level ofinterchangeability in the product design and sells a new productto the market, and in the second period, a remanufacturer collectsand cannibalizes the used products that were sold by the OEMand sells the remanufactured products. A product designed withhigh interchangeability (i.e., where a highly disassemble designwas adopted) will be efficient both to assemble as a new productand to disassemble for cannibalization, while a product designedwith low interchangeability will directly increase the productioncost for the OEM and the cost of cannibalization for the remanu-facturer [13,26,32,35,36]. In the first period, the OEM may decideto not strategically manipulate the level of interchangeability inits product design, or it may explicitly consider the degree ofinterchangeability in terms of the tradeoff between the benefits toitself and to the remanufacturer. In the second period, theremanufacturer may or may not determine the collection rate,which relates to the available quantity for remanufacturing [31].We apply the two common assumptions of multiple-periodmodels with remanufacturing [14,17,19,20,37]. The first assump-tion is that a new product purchased in the first period cannotprovide positive utility for the customers in the second period;thus, the product has a useful lifetime of only one sale period. Thisassumption allows us to claim that the consumers’ purchasingbehaviors across the two periods are independent. The secondassumption is that other products in the dedicated market andother markets have no effect on the demand of the productsunder consideration. This assumption allows us to focus specifi-cally on the competition between remanufactured products andnew products. Lastly, we also assume that the firms are risk-neutral and profit-maximizing and that they have completeinformation [38,39].

C.-H. Wu / Omega 41 (2013) 287–298 289

2.1. Market demand and cost structure

We let n and r denote new product and remanufacturedproduct, respectively. In the first period, the OEM behaves as amonopolist and chooses its unit sale price p1. In the secondperiod, the remanufacturer enters the market and competes withthe OEM in a duopolistic price competition. (Note that to focus onprice competition, we neglect other interactions between pro-ducts on other attributes such as quality and warranty. Thisconsideration is reasonable if customers do not differentiatebetween the new product and the remanufactured product interms of quality or warranty [1].) The OEM decides the unit saleprice pn of the new product and the remanufacturer chooses theunit sale price pr of the remanufactured product. We assume thatthe unit sale price of the remanufactured product is lower thanthe sale price for the new product (i.e., pr opn). This assumption isnot unrealistic because of the energy and material cost savings forremanufactured products. For example, remanufactured car-tridges sold at 30–70% below the prices of new cartridges onaverage [13].

The market in each period consists of A consumers, who areprice-sensitive and make purchases depending on their utilityfunctions. For simplicity, we normalize a consumer’s valuation ofa new product to 1 and thus formulate each consumer’s utilityfunction for period 1 as U1 ¼ 1�p1. The demand quantity forperiod 1 is q1 ¼ Að1�p1Þ. In the second period, consumers make apurchasing choice between the new and remanufactured pro-ducts, and their valuations for remanufactured products areassumed to be lower. We denote r (rZ0) as consumers’ value-discount factor for a remanufactured product when comparedwith a new product. Consumers are price sensitive and hetero-geneous in their preferences for new and remanufactured pro-ducts. Following Geylani et al. [40], Hotelling [41], and Sajeeshand Raju [42], we model the preference heterogeneity as con-sumers being uniformly distributed along a Hotelling-typestraight line with products located at both ends. We let x

(f ðxÞ �Uniform½0;1�) represent a consumer’s preference distanceto a remanufactured product. Therefore, the preference distanceto a new product is 1�x. Each consumer purchases one unit of theproduct and incurs a transportation cost t per unit of preferencedistance. As a result, the utility a type-x consumer receives from anew product is Un ¼ 1�tð1�xÞ�pn, and the utility from a rema-nufactured product is Ur ¼ r�tx�pr . Each consumer buys theproduct that provides him or her with the higher utility. Morespecifically, we let Yn and Yr be the sets of x-type consumerswho buy a new and remanufactured product, respectively, whichgives us Yn ¼ fx : UnZmaxfUr ,0gg and Yr ¼ fx : Ur ZmaxfUn,0gg.Furthermore, the market share of the new (remanufactured)product is mn ¼

RxAYn

f ðxÞ:y (mr ¼R

xAYrf ðxÞ:y). The primary con-

sumers’ demand quantity of the remanufactured and new pro-ducts can be calculated as

qr ¼ Amr ¼ A�1þtþrþpn�pr

2t

� �,

qn ¼ Amn ¼ A1þt�r�pnþpr

2t

� �:

Note that we focus on the case where 1�t�pnþpr oro1þt�pnþpr so that the conditions qn40 and qr 40 are held.

The OEM carries a production cost c per unit, and theremanufacturer carries a unit cannibalization cost c�s, where s

denotes a unit of cost savings from remanufacturing [14,17,18].The interchangeability designed into the assembly and disassem-bly of cores and parts is critical in determining the ease ofrecycling, replacing, and remanufacturing, and it therefore influ-ences the chain members’ cost structures. We let t ð�1oto1Þ

denote the OEM’s choice of interchangeability in their productdesign, where 0oto1 and �1oto0 represent high and lowdegrees of interchangeability. We assume that with a t-level ofinterchangeability in the product design, the unit production costof the new product is c�dnt, and the unit cannibalization cost isc�s�drt, where dr , dnZ0. These calculations represent theimpact factors of the degree of interchangeability on the produc-tion costs of remanufactured and new products, which arereferred to hereafter as ‘‘cost changes’’. When t¼ 0, the OEMdoes not adjust the product-design strategy; therefore, theproduction costs of the new and remanufactured products donot change. When 0oto1, the OEM increases the degree ofinterchangeable design, which benefits both the OEM and theremanufacturer by increasing assembly/disassembly efficiencyand thereby saving production energy and decreasing the timeand cost of processing. In this case, dr and dn are considered as thecost savings from the increasing degree of interchangeability.Conversely, when �1oto0, the OEM chooses a lower designinterchangeability, leading to an increased unit production costsfor the new and remanufactured products. In addition, a change inproduct design is accompanied by an additional fixed cost k forthe OEM in the first period only, as it is reasonable to assume thatthe updated equipment or facilities can be used in the secondperiod as well. Following Setoputro [26] and Kim and Chhajed[27], we formulate k as a quadric form of t: ðlt2Þ=2, where l40 isthe sensitive parameter of k with respect to t. For the sake ofsimplicity, c � 1�c. A similar cost structure (i.e., quadric formwith respect to a single attribute) is also used in other studies(see, for example, [15,43,44]).

2.2. Profit functions and equilibrium decisions

The chain members move sequentially. The OEM first deter-mines the degree of interchangeability in the product design andthe unit sales price (p1) for the first period. Next, the OEM and theremanufacturer both choose their respective unit sale prices (i.e.,pn and pr) for the second period. We assume that the firms adopt aconstant policy regarding their product-design and pricing deci-sions during the planning periods [18]. The profit function for theOEM is written as

maxp1 ,pn ,tZ0

Pn ¼ ðp1�cnÞq1þðpn�cnÞqn�k

¼ ðp1�cþdntÞq1�ðpn�cþdntÞqn�lt2

2: ð1Þ

The first and second terms of Eq. (1) represent the profit obtainedin the first and second periods, respectively, and the third term isthe sum of the additional costs associated with adjusting thedesign interchangeability. At the end of the first period, theremanufacturer collects the used products for cannibalization. Ingeneral, not all products can be returned at the ends of their lifecycles. We consider that at most gq1 can be collected by theremanufacturer, where g denotes the collection rate taking intoaccount the fact that only a proportion of the used products areobtained in the second period. (Note that under strategic compe-tition, the remanufacturer can independently choose its collectionrate to be low or high.) Thus, the remanufacturer’s profit-max-imizing problem in (2) is constrained by the quantity of collectedunits in (3):

maxpr Z0

Pr ¼ ðpr�crÞqr ¼ ðpr�cþsþdr tÞqr , ð2Þ

s:t: qr ogq1: ð3Þ

The OEM chooses the level of interchangeability in its productdesign and the unit sale price of the new product before the firstselling period, knowing that it will face competition with the

C.-H. Wu / Omega 41 (2013) 287–298290

remanufacturer in the future. The remanufacturer chooses theunit sale price of the remanufactured product based on theinterchangeability of the product design as well as the OEM’sunit prices. As the Hessian matrix is negative definite,H¼ 4A2=3t240, we can derive the best-response function p[i(p[i Aarg maxpi Z0Pi,i¼ r and n) as in Proposition 1. (Note thatthe proofs of the propositions presented in this paper are allincluded in the online supplementary materials):

Proposition 1. When

gZg0ðt,p1Þ ¼1�s�3t�rþtdn�tdr

6tð�1þp1Þ: ð4Þ

Eq. (3) is held such that the firms’ equilibrium decisions can be

derived as

p[n ¼13ðrþ3c�sþ3t�tð2dnþdrÞÞ and

p[r ¼13ð�rþ3c�2 sþ3t�tðdnþ2drÞÞ:

When gog0ðt,p1Þ, collection constraint in (3) is bound such that the

firms’ equilibrium decisions are given by

~p[n ¼ cþ2tgþ2tgp1�tdn and

~p[r ¼�cþ3t�4tgþrþ4tgp1�tdn:

Proposition 1 indicates that there exists a collection ratethreshold above which remanufacturing is no longer constrainedby the collection quantity. This threshold is a function of theOEM’s decisions in the first period, indicating that the OEM andthe remanufacturer both choose their respective best-responseregimes depending on the first-period decisions. Moreover, wecan see that p[n and p[r decrease when the level of interchange-ability increases, because the elevated interchangeability wouldlead to a reduction in the chain members’ costs. The cost savings,di (i¼ r,n) and s, from product design and from remanufacturingbehave differently on the chain members’ best-response functionsrelating to prices, and thus the chain members choose differentprices at equilibrium. In addition, if dn4dr , the threshold of g inEq. (4) decreases in t; otherwise, the reverse holds. This findingindicates that when the cost change for the OEM is higher thanthe cost change for the remanufacturer, the price of new productswill decrease more than the price of remanufactured products.This change in prices shifts demand to the OEM, which causes theremanufacturer’s collection constraint to slacken. (Note thatcollection constraint hereafter indicates the constraint of theremanufacturer’s collected quantity for remanufacturing.)

In relation to best-response functions, two regimes for theOEM’s first-period decisions at equilibrium can be considered. Letthe superscript ‘‘n’’ (‘‘ y ’’) denote the equilibrium values whenremanufacturing is unbound (bound) to the collection quantity.(Note that we use ‘‘unbound’’ to represent the remanufacturing isconstrained by limitations in the collection of used items and‘‘bound’’ to represent the contrary case.) Specifically, tn,pn

1Aarg maxp1 Z0,tZ0Pnðp[n,p[r Þ, and ty,py1Aarg maxp1 Z0,tZ0Pnð ~p

[n, ~p[r Þ.

The equilibrium decisions of the OEM can thus be shown inProposition 2.

Proposition 2. When gZ g ¼ g0ðtn,pn

1Þ

tn ¼ Aðð�9ctþ2zÞdn�2zdrÞ

Að9tþ2Þd2n�4Adndr�2ð9tl�Ad2

r Þand

pn

1 ¼Að9tþð1�zþcÞÞd2

nþAðz�2�2cÞdndr�ð1þcÞð9tl�Ad2r Þ

Að9tþ2Þd2n�4Adndr�2ð9tl�Ad2

r Þ,

where z¼ s�r�3t. When go g

ty ¼ Að�cþ4tgÞdn

Ad2n�2lð1�2tg2Þ

and py1 ¼ 1�lð�cþ4tgÞ

Ad2n�2lð1�2tg2Þ

:

Proposition 3. The non-negativity of the equilibrium decisions

assures the concavity of the OEM’s profit function with the best-

response functions.

Proposition 3 shows that the equilibrium decisions of the OEMin the first period are unique maximizers. (Note that the thresholdof g, i.e., g, is detailed in the proof of Proposition 2.) Substitutingthe first-period decisions of the OEM (as depicted in Proposition2) into the best response functions of the OEM and of theremanufacturer gives the equilibrium prices for the secondperiod: pn

i ¼ p[i ðtnÞ and pyi ¼ ~p[i ðty,p

y

1Þ, i¼r and n.

Proposition 4. When remanufacturing is unconstrained, gZ g, the

OEM chooses high interchangeability if dn4ð2zdrÞ=ð2z�9tcÞ, and

low interchangeability otherwise. When go g, the OEM always

chooses high interchangeability.

In Proposition 4, the OEM’s attitude toward interchangeabilityin the product design is explored. When remanufacturing isunbound, there exists a threshold of dn, above which the OEMwould choose high interchangeability. This finding indicates thatwhen interchangeability in the product design results in a greatercost reduction for the OEM than it does for the remanufacturer, ahigh level of interchangeability is more beneficial for the OEM.Moreover, when dn is sufficiently small, the OEM chooses lowinterchangeability to decrease the remanufacturer’s cost advan-tage. However, this threshold of dn is smaller than dr , so in somecases, the OEM will still choose high interchangeability, eventhough increasing interchangeability is also beneficial for theremanufacturer. When remanufacturing is constrained, thethreshold of dn is independent of dr , as the price of the remanu-factured product is determined where qyr is equivalent to thequantity of collected items. In this situation, pyr relates to py1,rather than being determined by the parameters associated withthe remanufacturer’s costs. Thus, there is no price competition;therefore, the product design does not have a direct effect on theremanufacturer’s pricing decision. As a result, the OEM can beexpected to choose high interchangeability because it chooses itsproduct design based only on its profits. Finally, when dn ¼ 0,there is no incentive for the OEM to choose a product design thatresults in high interchangeability and hence ty ¼ 0.

For comparison, we further derive the chain members’ equili-brium decisions for the scenario when the OEM does not pursuethe product-design strategy. Taking the best-response functionsinto the OEM’s profit function while setting t¼ 0, we obtain

that pn

1Aarg maxp1 Z0Pnðp[n,p[r 9t¼ 0Þ and py1Aarg maxp1 Z0Pn

ð ~p[n, ~p[r 9t¼ 0Þ. The equilibrium decisions when t¼ 0 are summar-

ized as follows: when gZ g ¼ g0ðpn

19t¼ 0Þ ¼ ðsþ3tþrÞ=ð3ctÞ

pn

1 ¼1þc

2, pn

n ¼r3þc�

s

3þt and pn

r ¼1

3ð�rþ3c�2 sþ3tÞ

otherwise

py1 ¼1þcþ4tgg

2�4tg2, pyn ¼ cþ

tð2�cgÞ1�2tg2

and

pyr ¼�c�tþrþ 2tð2�cgÞ1�2tg2

:

Proposition 3 assures the concavity of Pn with regard to p1 so thatthe above equilibrium decisions are unique.

C.-H. Wu / Omega 41 (2013) 287–298 291

3. Analysis of the equilibrium decisions

We next characterize the equilibrium decisions and quantitiesto show how the chain members act with respect to changes incosts and consumer preferences. We subsequently analyze theproduct-design cost changes and derive a sufficient conditionunder which it is profitable for the remanufacturer to enter themarket.

3.1. Characteristics of equilibrium decisions and quantities

In Proposition 5, we characterize the equilibrium decisions andquantities with respect to the unit production cost.

Proposition 5. When remanufacturing is unconstrained by collec-

tion, i.e., gZ g, the equilibrium decisions and quantities behave with

respect to c as below:

(i)

When the OEM pursues the product-design strategy: @tn=@co0,@pn

1=@c40, @pnn=@c40, @pn

r =@c40; @qn

1=@co0, @qnn=@co0 iff

dn4dr , and @qnr =@c40 iff dn4dr .

(ii)

When the OEM does not pursue the product-design strategy:@pn

1=@c40, @pnn=@c40, @pn

r =@c40, @qn

1=@co0, @qnn=@c¼ 0,

@qnr =@c¼ 0.

When go g, the following results are held no matter whether the

OEM makes a strategic product-design choice or not: @ty=@co0,@py1=@c40, @pyn=@c40, @pyr=@c40, @qy1=@co0, @qyn=@c40, and

@qyr=@co0.

Intuitively, we would expect the OEM and the remanufacturerto increase their prices for all periods in response to higherproduction costs. In period 1, the increase in prices lowers thefirst-period quantity, while in period 2, the quantities of newproducts and remanufactured products depend on the level ofproduct design and the parameters dn and dr . Because theremanufactured product possesses a low-price advantage, theincrease in production cost is more harmful to the OEM than it isto the remanufacturer. Thus, the OEM decreases the level ofproduct design to weaken the remanufacturer’s competitiveness,but that change also decreases demand for the products of theOEM in cases where the change in product design has a greatereffect on the cost expended by the OEM than on the remanufac-turer’s costs. On the other hand, when the OEM does not make astrategic product-design choice, qn

n and qnr are independent of c.

When remanufacturing is bound, qyr decreases in c due to thereduction of qy1, and demand subsequently shifts to the newproducts, i.e., qyn increases in c.

Proposition 6. When gZ g, the equilibrium decisions and quantities

behave with respect to s as below:

(i)

When the OEM pursues the product-design strategy: @tn=@so0iff dn4dr , @pn

1=@s40 iff dn4dr , @pnn=@so0, @pn

r =@so0;@qn

1=@so0 iff dn4dr , @qnn=@so0, and @qn

r =@s40.

(ii) When the OEM does not pursue the product-design strategy:

@pn

1=@s¼ 0, @pnn=@so0, @pn

r =@so0, @qn

1=@s¼ 0, @qnn=@so0,

@qnr =@s40.

When go g, all the equilibrium decisions and quantities are

independent of s regardless of whether the OEM makes a strategic

product-design choice or not.

Proposition 6 states the trends of the equilibrium decisionsand quantities with regard to cost savings for the remanufacturer.If the OEM makes a strategic product-design choice, the first-

period equilibrium decision trends with regard to s depend on dn

and dr . Specifically, when the change in the cost for the OEM ishigher than the change in the cost for the remanufacturer (i.e.,dn4dr), the OEM would choose low interchangeability to increasethe cost of cannibalization and would raise the unit margin of thenew product by increasing the first-period price. Conversely,when dnodr , the opposite results occur; that is, the cost savingsresulting from the product design are more beneficial to the OEMsuch that the OEM increases the interchangeability and decreasesthe first-period price. In addition, the price of the remanufacturedproduct decreases so significantly that more demand shifts to theremanufactured product. When remanufacturing is bound, pricecompetition is absent; therefore, all of the equilibrium decisionsand quantities are independent of s. This finding implies that inthis situation the OEM’s profits are independent of s, and theremanufacturer’s profits increase due to the higher cost savings.

We now turn to the effect of consumers’ preference for theremanufactured product on the equilibrium decisions and quan-tities, as summarized in Proposition 7.

Proposition 7. The effects of r on the equilibrium decisions and

quantities are as follows: When gZ g

(i)

the trends that @tn=@ro0, @pn

1=@r40 and @qn

1=@ro0 hold iff

dn4dr when the OEM pursues the product-design strategy; but,@pn

1=@r¼ 0 and @qn

1=@r¼ 0 if the OEM does not make a strategic

product-design choice,

(ii) @pn

n=@ro0, @pnr =@r40, @qn

n=@ro0, @qnr =@r40.

When remanufacturing is bound (go g), pyr increases in r, and the

other equilibrium decisions and all the equilibrium quantities are

independent of r; these results hold regardless of whether the OEM

makes a strategic product-design choice or not.

Proposition 7 suggests that when remanufacturing is not con-strained by the collection, the equilibrium price and quantity of theremanufactured product increase. Therefore, an increase in the valuethat consumers place on remanufactured products is beneficial tothe remanufacturer. The trends of the first-period decisions withrespect to r are identical to the trends with regard to s. This findingindicates that the OEM adjusts its decisions in period 1 in the sameway in response to the changes in parameters that are directlybeneficial to the remanufacturer (i.e., s and r). We numericallyexplore this effect of product design on the profit of the OEM for r,as shown in Fig. 1. We first observe that an increase in valuation ofthe remanufactured product is harmful to the OEM when the OEMand the remanufacturer are in competition (Pn

n2 decreases in r).Thus, the OEM adjusts its product-design level and its first-periodprice to increase its profits in the first period when there is nocompetition. If the OEM does not pursue the product-designstrategy, its first-period profit is independent of r. When remanu-facturing is constrained, all the equilibrium decisions and quantitiesare independent of r, except for the remanufacturer’s price becausethe remanufacturer can charge a higher price for the remanufac-tured product that has a higher valuation while keeping the level ofdemand equal to the quantity of used products it is able to collect.

3.2. Effects of the cost changes on equilibrium results

The decisions of the OEM regarding the level of interchange-ability affect the unit production costs of both new products andremanufactured products, which subsequently affect the equili-brium results. Thus, the extent of the product-design effects onthe equilibrium results depend on the cost-change parameters dn

and dr . To address this issue, we investigate the effects of dn anddn by considering three simplified scenarios: dn, dr ¼ 0, and

Fig. 1. Effect of r on the OEM’s equilibrium profits of period 1 (Pn

n1) and period 2 (Pn

n2) for the case where A¼ 50, t¼ 0:12, g¼ 0:9, c¼ 0:5, s¼ 0:1, dr ¼ 0:035, and l¼ 1:5.

C.-H. Wu / Omega 41 (2013) 287–298292

dr ¼ dn ¼ d. The investigation of these scenarios makes it possibleto systematically analyze the equilibrium decisions. In the firstscenario, where dn ¼ 0, the OEM uses its product design policiesas a strategic tool to deter competition from remanufacturerseven though the product design has no direct impact on the unitproduction cost for the OEM (dn ¼ 0). When dn ¼ 0, we obtain

tn ¼ Adrz9tl�Ad2

r

and ty ¼ 0:

When gZ g, tno0. This finding implies that the OEM uses theproduct design to lower the remanufacturer’s competitiveness byincreasing the remanufacturer’s unit cannibalization cost (seeProposition 4). However, when go g, the remanufacturer’s pricedepends on the availability of used items, and the product designof the OEM does not affect the remanufacturer’s price. This resultleads the OEM to choose ty ¼ 0. Moreover, pn

1 ¼ ð1þcÞ=2, whichindicates that level of interchangeability in product design has animpact on the OEM’s decisions regarding the first-period price,but the price competition in period 2 is ignored. As a result, incases where the product design has no impact on the unitproduction cost for the OEM, there is no sequential interactionbetween prices, which conforms the results in Atasu et al. [14],Ferguson and Toktay [19].

The impact of product design on the unit cannibalization costof the remanufacturer is summarized in Proposition 8:

Proposition 8. Let dn ¼ 0. When gZ g, the equilibrium decisions

and quantities behaves as follows:

(i)

@tn=@dr o0, @pn

1=@dr ¼ 0, @pnn=@dr 40, @pn

r =@dr 40,

(ii) @qn

1=@dr ¼ 0, @qnn=@dr 40, and @qn

r =@dr o0.

However, when go g, the equilibrium decisions and quantities are

independent of dr .

When remanufacturing is unbound, the impact of productdesign on the remanufacturer’s unit cost can cause what wouldnormally be a marginal effect of product design to be sufficientlyimportant that the OEM will take advantage of its position todeter remanufacturers by choosing a design that results in a lowerlevel of interchangeability. The reduction in interchangeability inthe design causes an increase in the cannibalization cost, whichultimately forces the remanufacturer to raise its unit price.(A product design that results in lower interchangeability alsocauses an increase in the OEM’s fixed costs, which leads to a risein the unit price charged by the OEM.) Therefore, this change inproduct design attracts more demand for new products.

Next, we discuss the effect of dn when dr ¼ 0. From Proposition4, we know that the OEM increases the level of interchangeabilityin the product design to decrease the unit production cost (i.e.,tn40). When remanufacturing is constrained by the collection

quantity, setting dr ¼ 0 does not affect the equilibrium decisionssummarized in Proposition 2, because of the absence of pricecompetition. The effects of dn on the equilibrium decisions andquantities are shown in Proposition 9:

Proposition 9. Let dr ¼ 0. When gZ g, the equilibrium decisions and

quantities behave as follows:

(i)

@tn=@dn40, @pn

1=@dno0, @pnn=@dno0, @pn

r =@dno0,

(ii)

@qn

1=@dn40, @qnn=@dn40, and @qn

r =@dno0.

However, when go g

(i)

@ty=@dn40, @py1=@dno0, @pyn=@dno0, @pyr=@dno0,

(ii)

@qy1=@dn40, @qyn=@dn40, and @qyr=@dn40.

Proposition 9 shows that when dr ¼ 0, the OEM is induced tochoose the design that is associated with a higher level ofinterchangeability by the increased impact of the change on themarket for remanufactured products. The OEM decreases theprices in the second period because of the cost savings that resultfrom the product design. This price reduction leads to severepressure on the remanufacturer to reduce its price, even thoughthe product design has no direct impact on the remanufacturer’scost. When remanufacturing is unconstrained, the lower pricesstimulate more demand for the new product and diminish thedemand for the remanufactured product. However, when rema-nufacturing is constrained, the equilibrium quantity of the rema-nufactured product also increases as the remanufacturer collectsmore items that were used in the first period.

Having examined each effect of dr and dn on the quantityproduced by remanufacturers while excluding the effect of otherfactors, we now consider the scenario where product design hasidentical effects on the OEM and remanufacturer, i.e., dr ¼ dn ¼ d.Proposition 10 presents the effect of d on the equilibriumdecisions and quantities. When remanufacturing is unbound,the OEM increases the interchangeability in d.

This results in cost savings for the OEM and the remanufac-turer, and therefore, they both lower their equilibrium prices. Thequantity demanded in period 1 increases with the decreasingprice. However, because the cost changes of the two products areidentical, the effect of the decreasing equilibrium prices on thequantities of the two products is neutralized. Accordingly, theOEM finds the strategy of product design to be ineffective indeterring competition from the remanufacturer. When remanu-facturing is bound, the trends of the equilibrium decisions andquantities with respect to d are identical to the trends withrespect to dn when dr ¼ 0 (as shown in Proposition 9) except forqyn, which decreases in d. This exception shows that if the

C.-H. Wu / Omega 41 (2013) 287–298 293

remanufacturer also experiences an advantage from the inter-changeable design, the increasing d decreases pyn and qyn andincreases ty, causing the OEM to obtain a lower profit from thesale and higher cost savings from the interchangeable design.

Proposition 10. Let dr ¼ dn ¼ d. When gZ g, the equilibrium deci-

sions and quantities behaves as follows:

(i)

@tn=@d40, @pn

1=@do0, @pnn=@do0, @pn

r =@do0,

(ii) @qn

1=@d40, @qnn=@d¼ 0, and @qn

r =@d¼ 0.

When go g

(i)

@ty=@d40, @py1=@do0, @pyn=@do0, @pyr=@do0, (ii) @qy1=@d40, @qyn=@do0, and @qyr=@d40.

To understand when the remanufacturer would not enter themarket, we show the conditions of the product-design parametersfor gZ g and the conditions of the unit cost for go g inProposition 11.

Proposition 11. (i) When gZ g, the remanufacturer does not enter

the market in the second period if

dr 4

ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi3lðsþ3t�rÞ

2A

rfor dn ¼ 0,

dn43

ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi2tlðsþ3t�rÞ

Að9tcþðsþ3t�rÞð9tþ2Þ�2z1Þ

sfor dr ¼ 0:

8>>>><>>>>:However, when dr ¼ dn, the product-design strategy is ineffective in

deterring the entry of the remanufacturer. (ii) When go g, the

remanufacturer does not enter the market in the second period when

c41�4tg for dn ¼ 0, dr ¼ 0, and dr ¼ dn.

From Propositions 8 and 9, we see that when remanufacturingis unconstrained, the effect of selecting the product-design

Fig. 2. Influence of dn and dr on qnr and Pn

r for the case where A¼ 50

strategy always leads to a reduction in demand for the remanu-factured product. This finding shows that considering the level ofinterchangeability that results from the product design is aneffective strategy for the OEM to discourage competition fromthe remanufacturer. We can obtain a threshold of dr (dn) whendn ¼ 0 (dr ¼ 0), above which the remanufacturer does not enterthe market because the choice of product design by the OEMleads to zero demand for the remanufactured product. Interest-ingly, this threshold is decreasing in A. When the market scale isgreater, the possibility that remanufacturing will be constrainedincreases. Therefore, no remanufacturer is likely to enter themarket because the greater market scale allows the OEM toamplify the effect of its product-design strategy. However, whendr ¼ dn, the effect of the product-design strategy on the demand ofthe two products is neutralized (see Proposition 10); therefore, aproduct-design strategy is ineffective in deterring competitionfrom the remanufacturer. When remanufacturing is constrainedby the collection, the equilibrium decisions are independent of dr

(dn) for dn ¼ 0 (dr ¼ 0). We derive a threshold of c for the threescenarios, above which remanufacturing is unprofitable. We findthe thresholds of c of the three scenarios are decreasing in g,which means that the higher the collection rate is, the lower theobstacle will be for the remanufacturer to enter the market.

A numerical example that is depicted in Fig. 2 illustrates howthe interdependence of dn and dr affects the remanufacturer’sequilibrium quantity and profits. If remanufacturing is not boundwhen dr closes to dn (i.e., when the difference in cost changesbetween the two products is less), the result is higher quantityand profit for the remanufactured products. This result corre-sponds to Proposition 10 because it suggests that when dr and dn

are close, the effect of the product-design strategy is counter-acted, and the strategy is therefore ineffective in preventing theremanufacturer from entering the market. However, as thedifference between dr and dn increases, the effect of the pro-duct-design strategy intensifies because the strategy brings about

, t¼ 0:12, r¼ 0:65, c¼ 0:5, s¼ 0:1, l¼ 2: (a) gZ g and (b) go g .

C.-H. Wu / Omega 41 (2013) 287–298294

a decline in the remanufacturer’s quantity and profit and therebydiscourages the remanufacturer from entering the market. Ifremanufacturing is bound, qyr is insensitive to dr but is increasingin dn, and Pn

r is concave in dn. Similarly, when dr and dn are close,the remanufacturer obtains a higher profit. Note that when theremanufacturing is constrained, the extent to which productdesign decisions can deter the remanufacturer decreases, evenwhen the difference between dr and dn is great.

4. Analysis of equilibrium profits and strategic choice

Next, we explore the characteristics of the equilibrium profitsunder different conditions of remanufacturing. We subsequentlyconsider aspects of the collection of used products that arecontrolled by the remanufacturer and investigate a strategic gamein which the remanufacturer chooses its collection strategy inresponse to the choice of product design made by the OEM.

4.1. Characteristics of equilibrium profits

We characterize the chain members’ profits at equilibrium todiscuss the way certain parameters, including consumers’ pre-ferences regarding the remanufactured product, cause changes inprofits. We first examine the effects of r on the equilibriumprofits through the numerical example shown in Fig. 3. Fig. 3depicts the situation where remanufacturing is not constrainedby limitations in collection and where a higher consumer pre-ference for the remanufactured product is beneficial to theremanufacturer but harmful to the OEM. When consumer pre-ference for the remanufactured product is sufficiently high (i.e.,r40:6914) that remanufacturing is limited by the collection ofused items, an increase in r is still beneficial to the remanufac-turer because the consumers are willing to pay more for theremanufactured product (as shown in Proposition 7), but theincrease in r does not affect the profit for the OEM because there

Fig. 3. Remanufacturer’s an OEM’s equilibrium profit trends with respect to th

s¼ 0:1, dn ¼ 0:045, dr ¼ 0:035, l¼ 1:5.

Fig. 4. Remanufacturer’s equilibrium profit trend with respect to

is no price competition. This finding indicates that encouragingconsumers to use the remanufactured product is always bene-ficial for the remanufacturer, and it is not necessarily harmful forthe OEM because the remanufacturer is constrained by theavailability of used items. In addition, we find that limitedremanufacturing is not always a disadvantage for the remanu-facturer and the OEM. Specifically, when ro0:6394, the remanu-facturer prefers to collect a quantity that is lower than the demandfor remanufactured products, and when rA ½0:6423,0:6914�, con-strained remanufacturing is also profitable for the OEM.

We determine the other parameters’ effects by considering thetrends of the equilibrium profits with regard to the percentchanges in parameters for the case where r¼ 0:7 and all else isheld the same. In this case, g ¼ 0:6174, whereupon g is set to0.8 and 0.5 for unbinding and binding remanufacturing, respec-tively. Fig. 4 demonstrates the sensitivity of the remanufacturer’sprofit with respect to the parameters’ percentage changes. Weobserve that when remanufacturing is unconstrained, the effectsof s, dr and dn are more significant than those of the otherparameters. Moreover, from Proposition 4, we know that in thisparameter setting, the OEM would choose the design with highinterchangeability (i.e., tn40). Thus, the higher dn enhances theOEM’s competitiveness, causing the remanufacturer’s profit todecrease. Working in opposition to this, we find that the rema-nufacturer’s profit increases when the remanufactured product’scost change (dr) increases, as the greater interchangeability in thedesign leads to an increase in cost savings. On the other hand,when remanufacturing is binding, the effect of the unit produc-tion cost on the remanufacturer’s profits becomes greater thanthe effect of the product-design strategy, as the remanufacturer’sprofits depend on the availability of the quantity in period 1,which only relates to the unit production cost.

In Fig. 5, when remanufacturing is not limited by the collec-tion, the profit of the OEM is lowered by the increasing unitproduction cost c, but that increase does not have a significantinfluence on the remanufacturer’s profit. Moreover, the increasing

e percent changes in r for the case where g¼ 0:8, A¼ 50, t¼ 0:12, c¼ 0:5,

the percent changes in parameters: (a) gZ g and (b) go g .

Fig. 5. Trends of the OEM’s equilibrium profit with respect to the percent changes in parameters: (a) gZ g and (b) go g .

Fig. 6. Extensive-form game between the OEM and the remanufacturer for the case where A¼ 50, t¼ 0:12, r¼ 0:65, s¼ 0:1, dr ¼ 0:04, l¼ 1:5: (a) c¼ 0:5, dn ¼ 0:05 and

(b) c¼ 0:4, dn ¼ 0:04.

C.-H. Wu / Omega 41 (2013) 287–298 295

magnitude of the cost savings from remanufacturing (comparedto OEM production) is harmful to the OEM because it makes theremanufacturer more competitive. However, the benefit to theOEM that results from the cost savings of interchangeability in thedesign increases with the increase in dn. Thus, the OEM has anincentive to lower the production cost by adopting an inter-changeable design, and the remanufacturer has an incentive toincrease the cost savings from remanufacturing by improving theremanufacturing efficiency. When remanufacturing is bound, theprofits of the OEM are adversely affected by an increase in c, butthey are insensitive to the other parameters. The absence ofcompetition mitigates the effects of product design such thatthe profits of the OEM depend only on the cost structure.

4.2. The strategic game between the OEM and the remanufacturer

In the preceding analyses, we treated the collection rate as anexogenous variable. However, it is often feasible for the remanu-facturer to do certain things that have an impact on the rate ofcollection. To address this possibility, we consider an extensive-form game in which the OEM in period 1 chooses whether toadopt the product-design strategy, and the remanufacturer inperiod 2 enters the market and independently decides thecollection approach that it will adopt, given the fact that a lowcollection rate will cause the volume of remanufacturing to beconstrained by the availability of used items, but a high collectionrate will allow the volume of remanufacturing to be uncon-strained. We let P and N represent the situations where theOEM does or does not pursue the low interchangeability product-design strategy, and we let B and U denote the situations wherethe remanufacturer chooses a low or high collection rate suchthat the remanufacturing is bound or unbound. Based on theabove conditions, four possible scenarios emerge: PU, PB, NU, andNB. We illustrate the strategic game with an example where

A¼ 50, t¼ 0:12, r¼ 0:65, s¼ 0:1, dr ¼ 0:04, l¼ 1:5, as depictedin Fig. 6. The remanufacturer chooses a low collection rate(g¼ 0:4) that results in restricted remanufacturing or a highcollection rate (g¼ 1) that results in unconstrained remanufactur-ing. In Fig. 6(a), if the OEM does not choose the interchangeabilityon design, the remanufacturer prefers the approach that leads tounconstrained remanufacturing (Pn

r ¼ 0:2804Pyr ¼ 0:254), butthe OEM prefers to the opposite choice (Pn

n ¼ 11:74oPyn ¼13:24). However, the product-design strategy of the OEM notonly affects the remanufacturer’s choice but also improves theprofit of the OEM (from 11.74 to 13.29). This causes PB to be theequilibrium choice. Furthermore, the product-design strategy ofthe OEM mitigates the remanufacturer’s competitiveness, therebydecreasing the remanufacturer’s profit from 0.280 to 0.251.However, the product-design strategy does not always hurt theremanufacturer. Fig. 6(b) shows that when the remanufacturer’spreference toward remanufacturing is consistent with the OEM’spreference, the product-design strategy is still beneficial for theOEM (Pn increases from 14.16 to 14.23) as well as for theremanufacturer (Pr increases from 0.294 to 0.297).

From Section 4.1, we know that the cost-associated para-meters c, s, dn, and dr have significant effects on the chainmembers’ equilibrium profits; therefore, we show the equilibriumchoices of the strategic game with regard to the changes of theseparameters by setting A¼ 50, t¼ 0:12, r¼ 0:65, c¼ 0:5, s¼ 0:1,dn ¼ dr ¼ 0:04, l¼ 1:5, and g¼ 0:25 (g¼ 1) for bound (unbound)remanufacturing. Fig. 7(a) shows that determining the level ofinterchangeability in the design is a dominant strategy for theOEM for all values of c and s. This figure also shows that when c

and s are large enough (i.e., above Boundary I), the equilibrium ofthe strategic game falls in PU, but in other cases it falls in PB. Withthe aid of Propositions 5 and 6, we can see that higher values for c

and s cause the remanufactured product to be more competitivein price and thus stimulate more demand, which causes

Fig. 7. Equilibrium of strategic choices with respect to parametric changes: (a) changes of c and s and (b) changes of dr and dn.

C.-H. Wu / Omega 41 (2013) 287–298296

unconstrained remanufacturing to be preferred by the remanu-facturer. When c and s are sufficiently small (i.e., below BoundaryII), the product-design strategy of the OEM would not affect theremanufacturer’s preference for binding remanufacturing. Theproduct-design strategy may be profitable to the remanufacturer,that is, the gray area, which, in this example, is identical to thearea with PB equilibrium. In the gray area, both chain memberscomply with the equilibrium of the strategic game, even thoughthe OEM’s product-design strategy may induce the remanufac-turer to change its strategic choice. For example, in the areabetween Boundaries I and II, the OEM’s product-design strategymay cause the remanufacturer to change its choice from U to B.

Fig. 7(b) shows that the product-design strategy is still adominant strategy for the OEM for the entire range of values fordn and dr . In this example, the remanufacturer always prefers highcollection rate in the absence of the product-design strategy. Inthe presence of a product-design strategy, we find that theremanufacturer would turn to restricted remanufacturing whenthe difference between dr and dn is sufficiently large. FromSection 3.2, we know that Pn

r and qnr are greater when dr and dn

are close together because in such cases the effect of the product-design strategy is insignificant so the remanufacturer prefers toproduce as much as possible (i.e., it selects a high collection rateso its volume of remanufacturing will be unconstrained). On theother hand, when the difference between dn and d is larger, theproduct-design strategy has a harmful effect on Pn

r . However, asituation in which the volume of remanufacturing is constrainedwould decrease this negative effect such that the remanufacturerwould prefer to restrict its remanufacturing quantity when thedifference between dn and d is large. Additionally, the gray arearepresents the product-design strategy that is profitable for theremanufacturer. We find that this gray area is made from thethresholds obtained in Proposition 4 (the dashed line) and thediagonal. This finding indicates that when dn4dr (i.e., in the areabelow the diagonal), increasing interchangeability results in agreater reduction in production costs for the OEM than for theremanufacturer and thus decreases the remanufacturer’s compe-titiveness. However, in the area between the dashed line and thediagonal, even though the product design has a more significantimpact on the remanufacturer’s production cost than on theproduction cost for the OEM (i.e., dr ZdnÞ, the OEM still increasesthe interchangeability in design (i.e., tn40Þ, and this increasecauses a profitable region to emerge for the remanufacturer. Inthis region, the product-design strategy of the OEM does notreduce the remanufacturer’s competitiveness. Instead, the

interchangeability in the design provides a cost saving for theremanufacturer. In the area above the dashed line, the productdesign strategy of the OEM is harmful to the remanufacturerbecause the OEM chooses to decrease interchangeability to lowerthe remanufacturer’s competitiveness.

5. Conclusion

This study provides insights for OEM managers who facecompetition from remanufacturers and who could use theirproduct design policies strategically to deter remanufacturing.We formulated a two-period problem in which an OEM deter-mines its product-design level in the first period, and a remanu-facturer enters the market to compete with the OEM based onprice in the second period. By focusing on the market and costdrivers, our model captures several of the key elements that driveproduct design and pricing decisions. We characterize the effectsof production cost, cost savings, parameters associated withproduct design, and consumer preferences relating to remanu-factured products on equilibrium decisions and profits. Wefurther examine the strategic interaction between the product-design strategy of the OEM and the approach taken by theremanufacturer in collecting used items. Investigating the effectof product design on the chain members’ choices and equilibriumdecisions captures a unique aspect of remanufacturing that hasnot been explored in previous research. The decisions and profitlevels of the OEM are often driven, at least in part, by productioncosts and the price competition from remanufacturers. An OEMmay be able to respond to these exogenous threats by adjustingthe degree of interchangeability that follows from its productdesign because the product design of the OEM has an impact onthe remanufacturer’s cannibalization cost. For example, if theinterchangeability associated with a product design results ingreater cost savings for the remanufacturer than for the OEM, theOEM will lower the interchangeability to reduce the remanufac-turer’s competitiveness. Otherwise, the interchangeable designwill undermine the price competitiveness of the OEM. Theproduct-design strategy is effective in deterring market entry bythe remanufacturer when cost changes for products of the OEMand the remanufactured products are substantial. Furthermore,the chain members’ equilibrium profits are significantly influ-enced by the parameters associated with product design. Whenremanufacturing is constrained, however, the impact of productdesign becomes insignificant. As a result, the remanufacturer may

C.-H. Wu / Omega 41 (2013) 287–298 297

prefer to accept limits on the volume of its remanufacturing. Toaddress this issue, we consider a strategic game in which the OEMdecides whether to make changes that will affect interchange-ability, and the remanufacturer, in turn, chooses to pursue a low orhigh collection rate. Adopting the product-design strategy isalways the dominant strategy because it is beneficial for theOEM. However, the product-design strategy selected by the OEMmay also be profitable for the remanufacturer in cases where theproduction cost and cost savings from remanufacturing aresufficiently low, and where the effect of the product-designstrategy is insignificant (i.e., because the cost changes associatedwith the product design are similar for OEM products and forremanufactured products).

The results obtained in this study allow us to identify severalareas for future research that will contribute to a better under-standing of remanufacturing. One desirable extension of thisresearch would be an examination of OEMs that sell both newand remanufactured products because a remanufacturing initia-tive launched by the OEM would allow for a different equilibriumchoice of product design. However, this new approach wouldrequire the current models to be fundamentally restructured andthat would inevitably raise analytical complexities. A secondpossible extension might be to go beyond the Hotelling modelthat we used in this study to examine the competition betweennew and remanufactured products. In practice, a remanufacturercould focus on a certain market segment, e.g., green consumers[14]. To address this possibility, it might be interesting to considerthe impact of product design and pricing decisions in a model thatincludes different types of competition. A third possible extensionmight be to use the game-theoretical model to simulate the chainmembers’ behaviors but to expand the model by consideringother techniques and knowledge applied in industry. Finally,going beyond the focus in this study on the pricing decisions thatrelate to new and remanufactured products, it would be inter-esting to extend the model to the competition between new andreconditioned or repaired products on not only prices but also onother attributes, such as quality or warranty provisions.

Acknowledgments

The authors thank the anonymous referees for their construc-tive comments and suggestions that significantly enhanced thepaper. This research was supported by the National ScienceCouncil, Taiwan, ROC under grant #NSC-99-2410-H-224-028-MY2.

Appendix A. Supplementary data

Supplementary data associated with this article can be foundin the online version at http://dx.doi.org.10.1016/j.omega.2012.04.004.

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