Refurbishing authorization strategy in the secondary market for electrical and electronic products

In the electrical and electronic products secondary market, third party resellers (TPR) engaging in product refurbishing are growing rapidly, which provides direct competition to the original equipment manufacturers' (OEMs) new product sales. Irrespective of prices, consumers have shown a higher preference for refurbished products from the OEMs and OEM-authorized TPRs than non-authorized TPRs. As a result, some OEMs choose to provide refurbishing authorization to TPRs who are required to meet specific standards and pay an authorization fee. Besides the strategy of refurbishing authorization, an OEM could choose strategies such as participating in direct refurbishing work or not at all. The main goal of this paper is to examine under what conditions the refurbishing authorization strategy is optimal for the OEM. The essential tradeoff is whether the indirect benefit from authorizing a TPR, which includes an enlarging market share, can outweigh the direct cannibalization effect of authorized refurbished products on new products sales. To that end, we develop Bertrand competition models between an OEM and a TPR using several strategies. Results show that when the consumers' preference for refurbished products relative to new products is not large enough, the OEM should choose the authorization strategy. The OEM and authorized TPR achieve a win-win outcome under some conditions. We also find that a higher authorization fee is not always a better option for the OEM.