Trade-in strategy for a durable goods firm with recovery cost

This study deals with the trade-in rebates offered by the manufacturer to the consumers. We investigate when and how a durable goods firm should offer a trade-in rebate to collect and recover used products, in order to achieve better price discrimination and weaken competition from third-party remanufacturers. It creates segment effect by offering different prices to different groups of customers. This study determines the optimal pricing and/or trade-in rebate, and examines the strategic choice among the three options facing the firm. We develop analytic models that incorporate key features of durable goods into model formulation, namely the deterioration rate and the recovery cost of the used goods. Our research findings include: the rebate magnitude of trade-in-to-high option increases in the deterioration rate, but decreases in the customer's willingness to trade-in and the manufacturing, recovering, and maintenance costs, and the strategic choice among the three options depends critically on the two features of the deteriorating rate and recovery cost.