Price and Service Competition between New and Remanufactured Products

This paper sets two manufacturers on the market. One is traditional manufacturer, which produces new products, and the other remanufactures by recycling used products. Two manufacturers sell products to customers through one retailer and also provide product-related services. Three participators decide prices and service levels independently. We discuss the optimal decision of prices, service levels, demands, and profits in three scenarios: Manufacturers Stackelberg, Retailer Stackelberg, and Nash Equilibrium. We also study the influence of customer acceptance of remanufactured product (θ) on participators’ decisions. With the increase of θ, new product profit reduces; remanufactured product profit increases at the beginning and then decreases. Retailer profit grows steadily. In Manufacturers Stackelberg, new and remanufactured products can get the maximum profits, and retailer only has the minimum profit. In Retailer Stackelberg, retailer can get the maximum profit; new product only has the minimum profit and remanufactured product has the medium gain. In Nash Equilibrium, new product and retailer have the medium gains, and remanufactured product has the minimum profit.


Introduction
Generally, remanufacturing refers to recovering, decomposing, cleaning, and reproducing the used products and putting them into reuse.Some governments and environmental organizations encourage enterprises to engage in remanufacturing under the pressure of the environment and resource.Many companies have established recycling and remanufacturing logistics to collect used products.Remanufacturing not only reduces the burden on the environment, but also decreases the cost of production.According to Global Industry Analysts (2010), the global machinery industry remanufacturing output grows fast in recent years and it is expected it will reach $104.8 billion in 2015.In USA, remanufacturing industry output value accounts for 0.4% of GDP.Other industries, such as printer cartridges, electrical equipment, electronic equipment, and furniture, also grow quickly in recent years (Hauser and Lund [1]).
So, with the rise of the remanufacturing industry, traditional companies must pay attention to the change.Their market strategies must be adjusted accordingly.For example, HP has set up a department for recycling, remanufacturing, and selling.Its remanufactured products are almost comparable to new products on performance and prices are lower.It also provides warranty and related services on remanufactured products.Therefore, customers should choose between new and remanufactured products based on product information of prices and services.
In existing literatures, remanufactured product studies focus on recovery, price, cost, demand, and so on.There is little consideration of their direct competition with new product in the same market.In addition, the current studies concentrate on prices, but service, as a very important factor affecting customer demand, has attracted a lot of attention.In this paper, there are two manufacturers and one retailer on the same market.One manufacturer supplies new products and the other provides remanufactured products.Two companies sell products through one retailer and also provide product-related services to customers.We analyze their optimal decisions of prices, services, demands, and profits.We also discuss the impact of customer acceptance of remanufactured product on their decisions.

Literature Review
Service as an important factor affecting demand has attracted more and more attention in theoretical and academic research.Iyer [2] examines how manufacturer coordinates channel distribution when two retailers compete with price and nonprice factors.It concludes that quantity discount is not enough to coordinate such a channel.Tsay and Agrawal [3] study a supply chain with two competing retailers and a common manufacturer in which both retailers provide products as well as service to customers.Thus, retailers sell the same products and compete with price and service.Raju and Zhang [4] show that a menu of two-part tariffs can coordinate a dominant retailer channel, but it is not always profit manufacturer.Only when retailer is sufficiently dominant, a menu of two-part tariffs can be a better choice than a quantity discount.Koulamas [5] studies that the manufacturers and retailers can use revenue-sharing policies to achieve channel coordination effectively.Many papers have also addressed service competition, such as Ba et al. [6], Bernstein and Federgruen [7], de Borger and van Dender [8], Darian et al. [9], Dan et al. [10], and Kurata and Nam [11].
Recently, studies have begun to pay attention to remanufacturing.They often analyzed the recycling effort or profitability with remanufacturing [12][13][14][15][16][17][18][19][20][21][22].Savaskan et al. [20] study price decision and collection effort in a supply chain with three types of reverse channels for remanufacturing.The study examines the incentives provided to the customer in order to improve the collection of used items.Savaskan and van Wassenhove [21] consider a duopolistic competition with a retailer.It also discussed the interactions surrounding price decisions with respect to forward and reverse channels.Atasu et al. [12] examined remanufacturing as a marketing strategy.It considered several factors, such as cost savings, greenmarket segments, competition with new products, and product life cycle.The study found that a remanufactured product is more profitable under monopolistic competition.They also pointed out that smart price decision making is important as the manufacturer cannibalizes used products.Other recent studies include Debo et al. [13], Ferrer and Swaminathan [14], Majumder and Groenevelt [23], Mitra and Webster [17], and others, which have shed light on competition in closed-loop supply chains with remanufacturing.However, these studies only focus on price interaction but do not include service interaction.

The Model
3.1.Model Overview.This paper discusses a monopoly market where there are two manufacturers and one retailer.One manufacturer uses new raw materials to produce new products; the other collects used products and produces remanufactured products.Two manufacturers sell products at wholesale prices through the same retailer, and retailer sells two kinds of products to consumers at retail prices.Both products have the same functions [20,21].Two manufacturers also provide product-related services to customers.Three participants decide prices and service levels independently.The model is shown in Figure 1.

Customer
Wholesale Wholesale

Retail price Retail price
Service Service

Assumptions.
For simplifying the study, this paper presents the following basic assumptions.
Assumption 1 (the wish to purchase remanufactured product is less than buying new product for customer).Although new and remanufactured products are almost the same in the function, for ordinary consumer, there is also discrimination for remanufactured products [12,14,23].Vast majority of consumers would like to choose new product rather than remanufactured product in the same prices and service levels.As described by Ferguson and Toktay [24], we define  as the consumer acceptance of remanufactured product. = 1 indicates full acceptance of remanufactured products;  = 0 means nonacceptance of remanufactured products completely; usually 0 <  < 1.
Assumption 2 (the unit production cost of remanufactured product is less than new product).  means unit production cost for remanufactured product and   means unit production cost for new product, where   <   .Such assumption is fit in actual situation.In fact, lower production cost is the main reason why many companies engaged in remanufacturing.Relative to the new product, it can save 30-70% of the cost of production (Gray and Charter [25]).Such assumption is also used in many literatures [20,21,26].
Assumption 3 (companies have sufficient production capacity to meet market demand).This assumption means we do not consider the limit of production capacity.For new product manufacturer, there are unlimited raw materials in the market to purchase, so it has adequate production capacity to process.For remanufactured product manufacturer, the raw materials needed for its production have a variety of collecting channels, including new products sold on previous stage and similar waste products produced by other manufacturers.So, these collecting channels can meet the requirements of remanufacturing completely [20,21,27].
Assumption 4 (demand function).According to the economics theories and literatures [3,24,28], when price reduces or service level improves, demand for product will increase; otherwise it will decrease.So, when there is only a single new product in market, the product demand function is where  represents the potential market demand.It is equal to the demand when price is zero, and no service is provided.We set   as the price and   as the service level of new product.
When remanufactured product appears on the market simultaneously, Ferguson and Toktay [24] give a price-based demand function: where   represents price of remanufactured product;  means consumer acceptance of remanufactured product, and 0 <  < 1;   ,   represent the demands of new and remanufactured product.
Combining formulas (1)-( 2), we give the demand functions in this scenario: where   ,   represent service levels of new and remanufactured product.
Assumption 5 (cost and profit functions).Because   means unit production cost of new product, total costs of production are     .According to the literature, Tsay and Agrawal [3], total costs of services are proportional to their level square.So we set  as service cost coefficient and   as wholesale price; new product manufacturer profit function is We set   as remanufactured product unit production cost and   as wholesale price.So profit of remanufactured product is The retailer's profit is Assumption 6.All the members have perfect information of the demands and the cost structures of each member.Based on this, they try to maximize their own profits.

Scenarios.
We make the assumptions about strategic interactions, which can influence how the game is solved.In our research, three scenarios take place.
(1) Retailer Stackelberg.Retailer is dominant comparing to manufacturers and thus is the Stackelberg Leader.
(2) Manufacturers Stackelberg.Manufacturers are dominant comparing to retailer and thus are the Stackelberg Leaders.
(3) Nash Equilibrium.Three firms have equal bargaining powers and try to maximize their own profit.

Retailer Stackelberg
4.1.Decision Making Process and Result.In this scenario, retailer is the leader, and two manufacturers are in Nash Equilibrium.Retailer determines the optimal retail prices of new and remanufactured products firstly.Then, manufacturers, as the followers, according to retailer's decision, determine the optimal wholesale prices and service levels.The problemsolving process is as follows.

Mathematical Problems in Engineering
Then we check the Hessian for optimality: When 2(1 − ) > 1, the Hessian is a negative definite matrix and the second order condition is satisfied.

The Decision Making Process of Remanufactured Product
Manufacturer.There, we can also get Π  = Π  (  ,   |   ,   ).According to (5), the first order conditions can be shown as Then we check the Hessian for optimality: When 2(1 − ) > 1, the Hessian is a negative definite matrix and the second order condition is satisfied and ( 8) is also met.

The Decision Making Process of Retailer.
Having the information about the reaction functions of manufacturers, retailer would then use them to maximize its profit: The first order conditions can be shown as According to (13), the response prices for retailer can be derived: where The letters marked with * indicate the optimal solution.According to these results and (11), we can obtain the response wholesale prices and service levels of manufacturers: Then, we can get 4.2.Effect of  on Each Variable.According to (10) and ensuring  > 0,  > 0, we give two assumptions.
Assumption 7.  is big enough compared to ,   , and   .
These assumptions are applied to the entire following propositions.Proof of these propositions is in the Appendix.
Set  = 1000,  = 20,   = 100, and   = 50;  increases from 0.4 to 0.8.This group of dates learns from Ferrer and Swaminathan [14].We use MATLAB to simulate the change shown in Figure 2.For comparison, the following propositions all take this group of numerics to simulate.
With the rising of customer acceptance of remanufactured product, difference between new and remanufactured product becomes smaller.So there is little distinction between the two markets, and the competition becomes more intense.Both sides should have to improve service levels to stimulate requirements.
Proposition 10 (  *  / < 0,   *  / > 0).It means, with the rise of , new product price will reduce and remanufacturing product price increases.The simulation is shown in Figure 3.
For new product, with customer acceptance of remanufactured product rising, two kinds of products become more and more consistent.Retailer has to promote sales For new product, with the rising of acceptance of remanufactured product, two products become more and more consistent, which leads to the decrease of the retail price.
For remanufactured product, as the customer acceptance of remanufactured product rises, there are two factors affecting product demand.Firstly, there is growing acceptance of remanufactured product, which means potential demand is increasing.Secondly, discrimination between remanufactured and new products becomes smaller.The two kinds of products competition are more intense, which leads to potential demand decrease.At the same time, increase of  also means retailer's power is growing.
When  is smaller ( <   * *  ), the first factor plays a leading role and retailer's power is smaller.So, with the potential growth of demand, remanufactured product can get more profit by raising wholesale prices.When  is larger ( >   * *  ), the second factor plays a dominant role and retailer's power is greater.Although retail price increases, the retailer will still lower wholesale price to obtain more profit.

Proposition 12 (𝜕𝑞 𝑆 *
/ > 0,   *  / > 0).It means, with the rise of , new and remanufactured products sales both improve.The simulation is shown in Figure 5.With the rising of , new product lowers retail price and increases service level continuously, which makes demand increase.
Although remanufactured product raises the retail price, it also improves service level.The rising of  means potential demand increases.So, there is also increase in demand.retailer profit increases continually.The simulation is shown in Figure 6.

Proposition 13 (𝜕Π 𝑆
For new product, with the rising of , although sale increases, due to the decrease of wholesale price and increase of service level, the profit is decreasing.
For remanufactured products, at the beginning, due to the growth of wholesale price and sale, profit increases.But after reaching the inflection point, because wholesale price reduces and service cost increases gradually, little increase of sale is insufficient to cover the decline, so profit starts to decrease.
For retailer, profit of new product changes as follows.Although retail price decreases gradually, wholesale price also reduces, which means retailer transfers price loss to new product manufacturer.Because sale increases gradually, profit also increases.Remanufactured product profit changes as follows.At the beginning, although wholesale price rises, retail price will also increase, which means retailer transfers price loss to consumers.After reaching inflection point, retailer has more power.Despite retail price increases, retailer will still lower wholesale price.As sale is increasing, profit is also rising.In a word, retailer's total profit is increasing.
According to Proposition 13, we obtain the participators' expectations to .New product manufacturer wants  as low as possible.Smaller  means little customer acceptance of remanufactured product; thus more customers chose new product.Smaller  also signifies that two market segments are more clear and new product is a monopoly on the market.So, it can gain more profit.
However, remanufactured product manufacturer does not expect  to go up even more.When  is smaller, although its growth makes remanufactured product acceptance improve, thereby demand improves and profit increases.
However, when  is larger, the growth also makes the distinction between remanufactured and new products smaller, so that they will come into one market and do direct competition, which leads to lower prices and higher service levels and reduces profit.So remanufactured product hopes  remain in the inflection point ( = Π  * *  ); then remanufactured product can earn maximum profit.
Retailer hopes  become higher.The growth of  means remanufactured and new products competition becomes more direct, and retailer acquires more power.So it can lower wholesale prices and gain more profit.
For the benefit of society, higher   means more remanufactured products are sold, more waste materials are reused, and more social resources are saved.Because   *  / > 0,  should be as higher as possible, while remanufactured product manufacturer hopes it is equal to inflection point, which disaccords with the society.So how to balance the relationship between them deserves further research.

Decision Making Process and Results
. In this scenario, two manufacturers are leaders and have equal powers.Manufacturers determine the optimal wholesale prices and service levels of new and remanufactured products.Then retailer, as the follower, according to the manufacturers' decisions, determines the optimal retail prices.The problem-solving process is as follows.

The Decision Making Process of Retailer.
Π  = Π  (  ,   |   ,   ,   ,   ) denotes the profit of retailer at the stage when it sets   and   , given earlier decisions of   ,   ,   , and   .According to (6), the first order conditions are shown as follows: Then we check the Hessian for optimality.We have Because 4/(1−) 2 > 4/(1−) 2 ⇔ 0 <  < 1, the Hessian is a negative definite matrix and the second order condition is satisfied.

The Decision Making Process of Manufacturer.
Having the information about the reaction function of retailer, manufacturers will use it to maximize their profits: For new product manufacturer, the first order conditions are shown as For remanufactured product manufacturer Then we check the Hessian for optimality.We have So when 4(1 − ) > 1 the Hessian is a negative definite matrix and the second order condition is satisfied.
According to ( 22)-( 23), the responses for manufacturers are derived: Using the results and ( 20), we can obtain the responses of retailer: Then, we can get

Effect of 𝜃 on Each Variable
Proposition 14 (  *  / > 0,   *  / > 0).It means, with increase of the customer acceptance of remanufactured product, both new and remanufactured products will increase service levels.The simulation is shown in Figure 7.
This proposition is similar to Proposition 9.Because the increase of  makes difference of them smaller and competition intense, both new and remanufactured products should have to improve service levels.

Proposition 15 (𝜕𝑝 𝑀 *
/ < 0,   *  / > 0).It means, with the rise of , retail price of new product will reduce, and remanufactured product price increases.The simulation is shown in Figure 8.This proposition is similar to Proposition 10.For new product, retailer lowers price to promote demand.For remanufactured product, because of the increase of acceptance, retailer will raise price to get more profit.It means remanufactured product wholesale price increases at the beginning and then decreases.The simulation is shown in Figure 9.
This proposition is similar to Proposition 11.When  is small, the potential demand growth of remanufactured product plays a leading role, so remanufactured product can get more profit by increasing wholesale price.When  is larger, retailer has more power.Remanufactured product has to lower wholesale price.

Proposition 17 (𝜕𝑞 𝑀 *
/ > 0,   *  / > 0).It means, with the rise of , new and remanufactured products' sales both improve.The simulation is shown in Figure 10.It means, with the rise of , retailer profit increases.The simulation is shown in Figure 11.
This proposition is similar to Proposition 13.The reasons and consequences do not repeat.

Decision Making Process and Results
. In Nash Equilibrium, no one occupies leading power.All the participators have equal power and make decisions simultaneously.The decision variables are   ,   ,   ,   , and   ,   .The calculations are as follows: Then we check the Hessian for optimality: When 2(1 − ) > 1 the Hessians are negative definite matrixes and second order conditions are satisfied.
According to (28), we can calculate the optimal decisions and results in this scenario: (30)

Effect of 𝜃 on Each Variable
Proposition 19 (  *  / > 0,   *  / > 0).It means, with increase of the customer acceptance of remanufactured product, both new and remanufactured products will increase service levels.The simulation is shown in Figure 12.
This proposition is similar to Propositions 9 and 14.The reasons and consequences do not repeat.

Proposition 20 (𝜕𝑝 𝑁 *
/ < 0,   *  / > 0).It means, with the rise of , new product price will reduce, and remanufactured product price will increase.The simulation is shown in Figure 13.This proposition is similar to Propositions 10 and 15.The reasons and consequences do not repeat.16.
This proposition is similar to Propositions 13 and 18.The reasons and consequences do not repeat.

Comparisons of Three Scenarios
In this chapter, we will compare the service levels, prices, demands, and profits under three scenarios.

Proposition 24 (𝑠 𝑀
For new product manufacturer, when it has leadership power, it will take higher wholesale price and get maximum profit.In Retailer Stackelberg, its wholesale price and profit are minimum.
Whether manufacturers or retailer dominates, new product will take lower service level and get lower sale.Whether in strong or weak position, it uses lower service level to reduce cost.In Nash Equilibrium, it uses higher service level to promote demand.At the same time, it has lower sales in strong or weak position and higher sale in equal status.

Comparison of Remanufactured Product
In Manufacturers Stackelberg, remanufactured product has the highest wholesale price and profit, which is corresponding to its leader status.But in weak position, its wholesale price and profit are higher than Nash Equilibrium; it seems contrary to common sense.This is because even though two manufacturers have equal positions, remanufactured product receives restriction and influence from new product inevitably.When manufacturers have weak powers, new product manufacturer has more restrictions and becomes conservative and gives less influence on remanufactured product.Remanufactured product can use higher service level and price to increase sales and gains more profit.

Proposition 26 (𝑝 𝑁
When participators have unequal powers, two kinds of products' retail prices are equal and higher.This is because when manufacturers are dominant, they will raise wholesale prices, which affects retail prices.When retailer is dominant, it will lower wholesale prices and still takes higher retail prices to gain more profit.On the contrary, retail prices and profits are lower in Nash Equilibrium.So retailer gets maximum profit in leadership position and gains minimum profit in disadvantaged position.The result is similar to new product.

Conclusions and Future Research
This paper discussed the optimal decision of prices, service levels, demands, and profits in three scenarios.With increase of customer acceptance of remanufactured product, new product raises service level and demand and reduces wholesale price and profit.Remanufactured product also increases service level and demand, while wholesale price and profit increase at the beginning and then decrease.New product retail price reduces, and remanufactured product retail price increases.As two kinds of products sales rise, retailer profit grows.
In Retailer Stackelberg, new product takes the lowest wholesale price and gets the lowest profit; remanufactured product takes medium wholesale price and medium profit; retailer obtains maximum retail price and gains the highest profit.In Manufacturers Stackelberg, new and remanufactured products can get the highest wholesale prices and obtain maximum profits; retailer gets higher retail price but gains minimum profit.In Nash Equilibrium, new product and retailer can get medium prices and profits because of equal powers; remanufactured product only gets the lowest price and profit.
Nonetheless, this paper has made several assumptions.Relaxing these assumptions may allow us to better comprehend the interactive dynamics in a closed-loop supply chain.So, the further research directions are as follows.
(1) This paper is based on a static single-cycle model.However, this model can be operated in the multicycle or even infinite periodic in normal conditions [14].Atasu et al. [12] suggest that the recycling of waste product has two cases: A the number recovered is unlimited by the sale of new products; B the number recovered is limited by the new product sales in the previous phase.To simplify the analysis in this paper, we take the first case, assuming that there are enough waste materials for remanufacturing.Therefore, further research may consider a two-stage or multistage model, and the production of remanufacturing is restricted by the amount of new product sales, which can understand the production and marketing decisions deeply.
(2) To simplify the analysis, this study does not consider that new product manufacturer can impose restrictions on remanufactured product manufacturer, such as market access, brand licensing, and patent.The next research may consider adding these factors for further study.
(3) In this study, we assume that new and remanufactured product manufacturers have equal powers.However, remanufactured product is often affected by new product inevitably and has a relatively weak power in decision making.This paper is also aware of this factor in analysis.In future research, more reasonable assumption should be made in this area.

Appendix
In these proofs, based on Assumptions 7 and 8, we simplify the equals and then determine monotonicity.

Figure 1 :
Figure 1: Description of the model.

Figure 4 :≈ 4 − 2 √ 3 .
Figure 4: The influence of  to   ,   (because change of   is slight and cannot be shown clearly in one figure with   , the right figure only demonstrates the change of   .Some following figures also take this method).

Figure 5 :
Figure 5: The influence of  on   ,   .
Proof of Proposition 9. Consider  *  ≈ 1 (4 − )  ,   *   > 0, Product Manufacturer.Π  = Π  (  ,   |   ,   ) denotes the profit of new product manufacturer at this stage when it sets   ,   , given earlier decisions by pricing   ,   .According to (4), the first order conditions are shown as Proposition 22 (  * / > 0,   *  / > 0).It means, with the rise of , new and remanufactured products' sales both improve.The simulation is shown in Figure15.This proposition is similar to Propositions 12 and 17.The reasons and consequences do not repeat.