On the Competition between Two Modes of Product Recovery: Remanufacturing and Refurbishing

The markets for recovered products in China typically consist of both remanufactured and refurbished products. The government requires that the remanufactured product match the quality level of the new product, while no such requirements exist for the refurbished product. Furthermore, remanufacturing is a relatively new phenomenon in China, whereas the refurbishing industry is old, widespread, and largely unregulated. Compared to the new product, the two types of recovered products enjoy a cost advantage, but they suffer from a lower willingness‐to‐pay in the consumer market. These observations lead to a game‐theoretic model consisting of three players: an original equipment manufacturer (OEM) providing the new product, a remanufacturing firm, and a refurbishing firm. The goal is to understand what equilibrium market structure may arise and how the equilibrium outcome depends on some of the key model parameters. It is found that (1) the entry barrier for the remanufacturer is always higher than that for the refurbisher; (2) remanufacturing almost always reduces the environmental and social (E/S) impact of the secondary market (for spare parts), such as the consumption of raw materials and energy during parts production, emissions and safety concerns during product use, and the E/S impact incurred during product disposal; and (3) the OEM has a natural tendency to discourage any form of product recovery by a third party, refurbishing or remanufacturing. These findings have potential policy implications for the government’s effort in cultivating the remanufacturing industry.