Dynamic pricing of remanufacturable products under demand substitution: a product life cycle model
- 670 Downloads
We consider a manufacturer who sells both the new and remanufactured versions of a product over its life cycle. The manufacturer’s profit depends crucially on her ability to synchronize product returns with the sales of the remanufactured product. This gives rise to a challenging dynamic optimization problem where the size of both the market and the user pool are dynamic and their current values depend on the entire history. We provide an analytical characterization of the manufacturer’s optimal pricing, production, and inventory policies which lead to a practical threshold policy with a small optimality gap. In addition, our analysis offers a number of interesting insights. First, the timing of remanufacturing activity and its co-occurrence with new product manufacturing critically depends on remanufacturing cost benefits, attractiveness of the remanufactured product and product return rate. Second, there is a small upward jump in the price of the new product when remanufacturing is introduced. Third, the manufacturer keeps the new product longer on the market as the cost of remanufacturing decreases. Fourth, partially satisfying demand for the remanufactured item is never optimal, i.e., it is satisfied either fully or not at all. Finally, user pool and inventory of returned products are substitutes in ensuring the supply for future remanufacturing.
- Caterpillar (2009). Sustainability report. http://www.cat.com/sd2009 Accessed on September 1, 2010.
- Ferguson, M., & Toktay, B. (2005). The effect of competition on recovery strategies (Working Paper). Operations Management Collection, Georgia Tech Institute of Technology. Google Scholar
- Hauser, W., & Lund, R. (2003). The remanufacturing industry: anatomy of a giant. Boston: Boston University Press. Google Scholar
- Hindo, B., & Arndt, M. (2006). Everything old is new again. Business Week. September 25. Google Scholar
- Krikke, H. R. (1998). Recovery strategies and reverse logistics network design. PhD thesis, University of Twente. Google Scholar
- Mahajan, V., Muller, E., & Wind, Y. (2000). New product diffusion models. Berlin: Springer. Google Scholar
- Oksendal, B. (2005). Stochastic differential equations: an introduction with applications (6th ed.). Berlin: Springer. Google Scholar
- Seierstad, A., & Sydsaeter, K. (1987). Optimal control theory with economic applications. Amsterdam: North-Holland. Google Scholar
- Sethi, S. P., & Thompson, G. (2000). Optimal control theory: applications to management science and economics. Berlin: Springer. Google Scholar
- Van der Laan, E., Salomon, M., Dekker, R., & Van Wassenhove, L. (1999). Inventory control in hybrid production systems with remanufacturing. Management Science, 45(5), 151–172. Google Scholar
- Xerox (2007). Report on global citizenship. www.xerox.com. Accessed on September 1, 2010.