Nughthoh Arfawi Kurdhi

Revenue Management and Strategy for the Refurbishing Economy

With the rapid introduction of new generations of consumer electronics, an increasing number of consumers buy new electronics before products actually break down. An increasing number of such products are being refurbished, implying they are improved by the original manufacturer (OEM) or by a third party (3P) who then sells the product as-new for a reduced price. The consumer market is segmented in terms of its preferences for new or refurbished products, and this makes decisions for both OEMs and 3Ps regarding engagement in refurbishing, the authorization of refurbishing, and product pricing increasingly complex.

In this dissertation, we study the revenue management and strategic decisions of such firms.

Price-Perceived Quality Relationship for Refurbished Products

Consumer behavior toward refurbished products is different from the behavior towards new products and depends on how they value the product characteristics and their perception of the products’ quality. Hence, it is important to understand this behavior when dealing with pricing decisions for refurbished products. The principal keys in pricing decisions are the willingness-to-pay (WTP) and consumer preferences. An empirical study is a valuable way to analyze this purchasing behavior. We conduct three different behavioral studies with regards to different market situations, i.e., consumer behavior to a single refurbished product (Study 1), a competition between new product and its refurbished version (Study 2), and a competition between brands (Study 3). The objective of Study 1 is to estimate the price-perceived quality for refurbished products with different attributes such as brand, product condition, seller identity, eco-friendly certification, product type, and online market place. The price-perceived quality effects are measured by using two methods, i.e., price categorization and discrete choice experiment. The results of price categorization show that the attributes have influence on the price-level sensitivity (sensitiveness to price and quality) of refurbished products and an inverted U-shaped purchasing function always exists when the consumers are only faced with a single refurbished product and there is no any product substitute available in the same market. However, the discrete choice experiments yield different results. The results of this method in Study 1 and Study 2 show that an inverted U-shape exists for a low-brand refurbished product and is absent when the brand recognition is relatively high. The consumers are more sensitive to changes in discounts (or prices) of a refurbished product with a higher brand value. Moreover, Study 3 showed that the inverted U-shaped cannibalization behavior, that had been demonstrated in a monopolistic setting, is largely absent in a duopolistic setting. If the difference between the two brand levels is getting larger, the stronger is the negative perception of the low-brand valued firms’ refurbished products, and the market share difference at the same discounts also getting higher. The experimental results also show that cross-cannibalization is an effect to be reckoned with, especially for low-brand firms facing competition from high-brand firms offering refurbished products.

Revenue Management in Refurbishing Duopoly with Cannibalization

Based on the results of Study 3, we develop and analyze a formal model to shed light onto how such firms would need to make their strategic choices under duopolistic competition between firms with different brand strength, and under (often publicly set) collection constraints. Refurbishing has shown good economic potential, but firms remain wary due to the cannibalization effect on new product sales. The presence of competitors selling both the new product and its refurbished version adds an additional (cross-firm) dimension to this effect. Moreover, competitors may have similar brand strength or may be positioned differently in the market. Further, in practice, such firms are increasingly confronted by collection constraints, such as those imposed by national or supranational regulations. Our analytical results show that manufacturers with a strong brand should increase the prices of their refurbished products if the cross-cannibalization coefficients of the low-brand consumers are higher. For low-brand firms, competing on price is challenging; instead, such firms should focus on beating the high-brand competitors in collection and refurbishing efforts. Finally, we show that the collection constraints have an effect on the pricing strategy of both the high-brand and the low-brand manufacturers. As a consequence, such constraints that are typically set exogenously by public authorities will impact the actual pricing and market equilibria.

Authorization Strategy in Refurbishing with Consumer Behavior

Based on the results of Study 2, we develop and analyze a formal model to examine the conditions under which both the OEM and a 3P may benefit via an authorization strategy. The OEM usually has limited to no control over third party refurbishing firms. With the rapid growth of the market for refurbished electronic products, it would be beneficial for the OEM to cooperate with the 3P via an authorization scheme. We study the trade-off between the indirect benefit from authorizing a 3P and increase in market share vs. the effect of cannibalization on new product sales. We provide a general model for market segmentation and show how it can be adapted to fit the existing literature on market segmentation. We assume customers to follow a U-shaped cannibalization function, i.e., they get suspicious when the discounts are too high. This cannibalization function can also be viewed as a linear function when the price-quality threshold is sufficiently low. Our results show that authorization can be a win-win strategy for the OEM and the 3P when the functionality-oriented consumer segment is sufficiently large. There are three regions for 3P’s optimal price – the price-sensitive area, the quality-sensitive area, and the price-quality threshold.

Strategic Decision Making for Refurbishing Across New Product Generations

OEMs usually release new-generation products at an intensive rate. Hence, the OEM could choose to introduce the refurbished products before the introduction of the new model or wait for it. If a newer generation is introduced, the previous one becomes unattractive. If the OEM releases its refurbished products in this period, the firm may not need to worry about cannibalization. However, there may be some customers who are not willing to purchase the refurbished version of old generation. In order to deal with this problem, we construct and solve a two-period dynamic programming model constrained by the number of cores available for refurbishing, where the second period decision depend on the previous sales of refurbished product. Our study shows that in the first period, the manufacturer has three option decisions: full refurbishing, partial refurbishing, and no refurbishing. The decisions are driven by the price-drop coefficient, recovery fractions, demand cannibalization, and low-end demand.

Our models provide insight into the strategies that firms should follow in a market that is increasingly complex due to the presence of various generations of new and refurbished products, and firms that focus on refurbishing as their core business. With a circular economy that is developing more and more towards reusing our natural resources, we show that in such an economy, even without government interventions or taxation incentives, refurbished products can form a very relevant segment in the consumer electronics industry.