Optimal Policies for Selling New and Remanufactured Products

Because of environmental and economic reasons, an increasing number of original equipment manufacturers (OEMs)nowadays sell both new and remanufactured products. When both products are available, customers will buy theone that gives them a higher (and non-negative) utility. Thus, if the firm does not price the products properly, then pro-duct cannibalization may arise and its revenue may be adversely impacted. In this paper, we study the pricing problemof a firm that sells both new and remanufactured products over a finite planning horizon. Customer demand processesfor both new and remanufactured products are random and price-sensitive, and product returns (also called cores) arerandom and remanufactured upon receipt. We characterize the optimal pricing and manufacturing policies that maximizethe expected total discounted profit. If new products are made-to-order (MTO), we show that when the inventory level ofremanufactured product increases, the optimal price of remanufactured product decreases while the price differencebetween new and remanufactured products increases; however, the optimal selling price of new product may increase ordecrease. If new products are made to stock (MTS), then the optimal manufacturing policy is of a base-stock policy withthe base-stock level decreasing in the remanufactured product inventory level. To understand the potential benefit inimplementing an MTO system, we study the difference between the value functions of the MTO and MTS systems, anddevelop lower and upper bounds for it. Finally, we study several extensions of the base model and show that most of ourresults extend to those more general settings.