Relicensing as a Secondary Market Strategy

Abstract

Secondary markets in the Information Technology (IT) industry, where used or refurbished equipment is traded, have been growing steadily. For Original Equipment Manufacturers (OEMs) in this industry, the importance of secondary markets has grown in parallel, not only as a source of revenue, but also because of their impact on these firms' competitive advantage and market strategy. Recent articles in the press have severely criticized some OEMs who are perceived to be actively trying to eliminate the secondary market for their products. Others have policies that enhance their secondary markets. The goal of this paper is to understand how an OEM's incentives and optimal strategies vis-à-vis the secondary market are shaped contingent on her relative competitive advantage, product characteristics and consumer preferences. The critical tradeoff that we examine is whether the indirect benefit from maintaining an active secondary market (the resale value effect) can outweigh the potentially negative effect of the sales of used products at the expense of new product sales (the cannibalization effect). To that end, we develop a durable good model where the OEM can directly affect the resale value of her product through a relicensing fee charged to the buyer of the refurbished equipment. We analyze the OEM's strategy in both the monopoly and the duopoly cases, characterize the optimal relicensing fee set by the OEM, and draw conclusions on the conditions that favor stimulating or deterring the secondary market.

Optimal Remanufacturing Certification Contracts in the Electrical and Electronic Industry

“…In Oraiopoulos et al [10], because of software updates and copyrights, a TPR has to be relicensed by an OEM. This paper indicates that an OEM's control through mandatory certification could influence the growth of the secondary goods market.…”

“…We set the consumer preference for new products as 1, and the preference for remanufactured products as against the new ones as α. Here, 0 < α < 1 [10,39,42]. Likewise, we assume that consumers' preference for a certified remanufacturing channel is 1, and that their preference for a regular remanufactured channel as against the certified channel is β.…”

“…Assume that consumers' willingness to pay is θ, with a uniform distribution between [0, 1], which is θ ∼ U [0, 1] [10,12]. If they decide to purchase new products, the utility they get is U N = θ − P N ; if they choose to buy certified remanufactured products, the utility is U A = αθ − P R ; and if they choose uncertified remanufactured products, the utility is U R = αβθ − P R .…”

“…On the other hand, third party remanufactures (TPRs) thrive on the business of selling remanufactured products in the secondary market [9], which have posed a threat to the demand for new products [10]. The upgrading of e-products has led to the prosperity of the secondary market for remanufactured products.…”

“…(3) In the contract of piece-rate payment, a certified TPR pays a certification fee for each remanufactured product. This contract has been proposed by Oraiopoulos et al [10] in the relicensing of some manufacturers.…”