Competition for cores in remanufacturing

• Competition between an OEM and an IO both in the sales market and core acquisition.
• Acquisition price of the OEM only depends on its cost structure.
• Remanufacturing becomes (more) profitable option when OEM can maintain its market share.
• Remanufacturing is beneficial for OEM when consumers strongly prefer to return cores to OEM.
• When consumers have lower willingness to pay for the remanufactured products remanufacturing becomes less profitable.

We study competition between an original equipment manufacturer (OEM) and an independently operating remanufacturer (IO). Different from the existing literature, the OEM and IO compete not only for selling their products but also for collecting returned products (cores) through their acquisition prices. We consider a two-period model with manufacturing by the OEM in the first period, and manufacturing as well as remanufacturing in the second period. We find the optimal policies for both players by establishing a Nash equilibrium in the second period, and then determine the optimal manufacturing decision for the OEM in the first period. This leads to a number of managerial insights. One interesting result is that the acquisition price of the OEM only depends on its own cost structure, and not on the acquisition price of the IO. Further insights are obtained from a numerical investigation. We find that when the cost benefits of remanufacturing diminishes and the IO has more chance to collect the available cores, the OEM manufactures less in the first period as the market in the second period gets larger to protect its market share. Finally, we consider the case where consumers have lower willingness to pay for the remanufactured products and find that in that case remanufacturing becomes less profitable overall.