Revenue management in a refurbishing duopoly with cannibalization

Abstract

Refurbishing has promising economic potential, yet firms remain wary of its potential cannibalization effect on new product sales. Firms need to make strategic choices in competitive settings, involving varying brand strengths and collection constraints. The current study provides an empirical characterization of consumer behavior in such complex settings, which in turn informs an analytical model of optimal pricing policies. The results show that cannibalization (or switching) in a competitive environment has a linear relationship with price discounts, unlike the inverted U‐shaped relationship observed in monopolistic settings. The experimental results also highlight the relevance of cross‐cannibalization, especially for weaker firms (with low brand value) that compete with stronger firms to sell refurbished products. Our subsequent analytical results reveal how both competitors should adjust their refurbished product prices when internal and cross‐cannibalization coefficients change. Weaker firms should focus on surpassing stronger competitors in terms of collection and refurbishing efforts, which implies a predominant focus on operations. Finally, we show that refurbished product prices are a function of, and profits are concave in relation to, the number of core products collected by firms.

Should I endorse a third party? Authorization strategies for brand manufacturers in a refurbishing market

“…Each respondent answers questions where parameters of these categories are randomly chosen. Details of the experiment can be found in Appendix B, see also Kurdhi et al (2023) for additional details. The discount range is in line with Ovchinnikov (2011) and Abbey et al (2015).…”

“…We employ Apple as a high-end brand, to be consistent with previous studies (e.g., Abbey et al, 2017;Agrawal et al, 2015;Abbey et al, 2019;Kurdhi et al, 2023), and include Motorola as a low-end brand. This is also consistent with general public opinion, Global-Brands-Magazine ( 2023) place Apple at #2 in the world, and Motorola at #9.…”

“…Abbey et al (2015) discuss consumer perceptions for refurbished products; while Abbey et al (2019) discuss refurbishing and consumers' risky choices. Guide and Li (2010) estimate cannibalization using eBay auctions while Ovchinnikov (2011) and Kurdhi et al (2023) use explicit cannibalization function and estimate it via a behavioral study. Our paper extends prior cannibalization analysis.…”