Strategic Selection of Remanufacturing Business Models: A Consumer Perception Perspective

Abstract

As a key circular economy strategy, remanufacturing allows original equipment manufacturers (OEMs) to reduce waste by restoring used products to ``as-new'' conditions. This paper investigates an OEM's optimal remanufacturing business model by incorporating consumer perceptions into price and production quantity decisions. We analyze three alternative models: no remanufacturing, OEM in-house remanufacturing, and third-party remanufacturer (TPR) authorized remanufacturing. We extend the authorization with a two-part tariff contract and consider a stochastic market size. Through a numerical approach, we optimize price and quantity decisions based on consumer perceptions and develop a hierarchical decision roadmap to guide model selection. Our findings show that when consumer's perceived value of remanufactured products is high, OEM in-house remanufacturing is most profitable and reduces environmental impacts, but generally leads to a market dominated by remanufactured products. In contrast, when consumer's perceived value of remanufactured products is moderate and TPR remanufacturing significantly increases the perceived value of new products, the TPR-authorized remanufacturing is most profitable. It typically boosts total market sales, but accordingly increases environmental impacts. In addition, sensitivity analysis indicates that two-part authorization contracts are more advanced in meeting stringent environmental requirements than one-part contracts. Incorporating market size stochasticity enhances system profitability while keeping environmental impacts within a limited scope.