Trade-In Rebates for Price Discrimination and Product Recovery

We investigate when and how an original equipment manufacturer (OEM) should offer a trade-in rebate to recover used products in order to achieve better price discrimination and weaken competition from third-party remanufacturers (3PRs). This paper is motivated by a major IT equipment OEM, which negotiates with customers to offer them personalized trade-in rebates to induce them to return their old products and purchase new units. The company also faces increasing competition from 3PRs. We model such a trade-in program with negotiated rebates through a generalized Nash bargaining framework. Our main research question is whether the OEM should compete with a 3PR using only a trade-in program or by offering remanufactured products, or through both options. In the absence of 3PRs, the OEM always prefers to offer the trade-in program compared with not offering a trade-in program. As a trade-in program also helps to restrict the supply of used products to 3PRs, one would expect that offering a trade-in program would be more attractive in the presence of a 3PR. We show, however, that the OEM may find it detrimental to offer a trade-in program when faced with competition from a 3PR. We also show that despite the fact that cores are readily available via the trade-ins, the trade-in program makes it less attractive for the OEM to remanufacture. Finally, we show that offering a trade-in program may also lead to lower total environmental impact, but only in the presence of remanufactured products.