Delegation Versus Control Mechanism: Impacts on Second-Hand Markets With Product Upgrades

Abstract

The second-hand market (SM) trades used products from the reverse channel. In practice, manufacturers such as Apple Inc. collect used products and sell refurbished products in the SM. However, third-party firms (TPFs) such as Gazelle independently manage the SM. Alternatively, the manufacturer may delegate the responsibility of managing the SM to a TPF under a contract or choose to operate in the SM with a TPF serving as a competitor. The optimal strategy to manage the SM is an important operations issue for the manufacturer as well as the TPF. This decision becomes even more critical when the manufacturer plans to sell the upgraded version, markdown version, and remanufactured version of the product concurrently. In the presence of product competition, SM selling can affect the prices and sales of the markdown product as well as the upgraded product. Therefore, in this study, we analyze impacts of the manufacturer’s choice of delegation. Our analytical findings reveal that the SM selling strongly influences the equilibrium price and the demand for the markdown product offered by the manufacturer under all the mechanisms. However, demand cannibalization of the markdown product is most severe under the delegation mechanism. Additionally, we counter-intuitively reveal that the manufacturer is better-off under the delegation mechanism when the sales commission is low and remanufacturing cost is high. In fact, the delegation mechanism is found to be the most profitable arrangement for the manufacturer as well as the TPF. Interestingly, demand for the upgraded version product remains unaffected by SM sales under the independent TPF mechanism, allowing the manufacturer to launch the upgraded version product without any fear of demand cannibalization. Furthermore, we discover that consumers secure the maximum surplus under the competitive scenario owing to intense price competitiveness. For robustness checking, we further extend our model to consider the cases with variable remanufacturing cost, differential emission cost, environmental cost, and collection rate of used product.