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Trade-in Remanufacturing, Customer Purchasing Behavior, and Government Policy

Date：2016-06-08 From：

Lecture : Trade-in Remanufacturing, Customer Purchasing Behavior, and Government Policy

Place : Building 25A-3-A

Bio:

Fuqiang Zhang is currently a professor and area co-chair of Operations andManufacturing Management at Olin Business School, Washington University in St.Louis. He obtained his Ph.D. in Managerial Science and Applied Economics from theWharton School, University of Pennsylvania. His main research interests are in supply chain management, consumer analytics in operations management, and sustainable operations. His research has appeared in Management Science, M&SOM, Operations Research, Marketing Science, and Production and Operations Management. He received

the Wickham Skinner Early-Career Research Accomplishments Award from the Production and Operations Management (POM) society (2009), the Meritorious Service Award from M&SOM (2006, 2009, and 2011), and the Distinguished Service Award from Management Science (2009, 2010). He has served as the Secretary/Treasurer/VP Meetings of the Manufacturing and Service Operations Management (MSOM) society and Associate Editor for Management Science, M&SOM, and Omega.

Abstract:

Customer purchasing behavior may have substantial impact upon the outcome of a market. In particular, the forward-looking behavior of customers naturally interacts with the trade-in remanufacturing practice in which firms collect used products for remanufacturing by offering rebates that allow repeat customers to trade in used products for upgraded ones at a discount price. This paper studies how different intensities of strategic customer behavior impact the economic and environmental values of such trade-in remanufacturing practice. We demonstrate a new value of trade-in remanufacturing that it helps exploit the forward-looking behavior of strategic customers in the market, which is much more significant than the widely recognized revenue-generating and environmental benefits of remanufacturing. In particular, under trade-in remanufacturing, a firm may earn a higher profit when customers are more strategic. When customers are highly strategic, trade-in remanufacturing creates a tension between profitability and sustainability: On one hand, by exploiting the intensive forward-looking customer behavior, trade-in remanufacturing is quite valuable to the firm; on the other hand, with highly strategic customers, trade-in remanufacturing has a substantial negative impact on environment and social welfare, since it may give rise to a significantly higher production quantity without improving customer surplus. With nearly-myopic customers, however, trade-in remanufacturing benefits both the firm and the environment, since it motivates the firm to produce less in this case. Therefore, understanding the interactions between customer purchasing behavior and trade-in remanufacturing is important both to firms and policy makers. Finally, to resolve the above tension, we study how a social planner (e.g., the government) should design a public policy to maximize social welfare. The social optimum can be achieved by using a simple linear subsidy and tax scheme for all product versions. Such government policy counters strategic customer behavior and, thus, induces the social optimum independent of customer purchasing behavior.

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