Int. J.

Production Economics 140 (2012) 496–507

Contents lists available at SciVerse ScienceDirect

Int. J. Production Economics

journal homepage: www.elsevier.com/locate/ijpe

Price and service competition between new and remanufactured products

in a two-echelon supply chain
Cheng-Han Wu *
Department of Industrial Engineering and Management, National Yunlin University of Science and Technology, Yunlin 64002, Taiwan, ROC

a r t i c l e i n f o a b s t r a c t

Article history: In this paper, we consider a supply chain consisting of two manufacturers and a retailer. The first
Received 4 July 2011 manufacturer is a traditional manufacturer that produces the new product, while the second
Accepted 27 June 2012 manufacturer operates a reverse channel producing remanufactured products from used cores. Both
Available online 5 July 2012
manufacturers bundle their products with services, including warranty and advertisement, and they
Keywords: sell through the same retailer, which independently determines the sales prices. We assume that the
Game theory second manufacturer invests extra effort in facilitating the remanufacturing process. In this study, we
Pricing identify the equilibrium characteristics with respect to the remanufacturer’s effort and price and
Remanufacturing service decisions for all members of the supply chain. We also investigate the profits of chain members
Service
by considering different interactions between prices and service. Based on the theoretical and
Supply chain management
numerical analyses, we derive economic and managerial insights for chain members.
& 2012 Elsevier B.V. All rights reserved.

1. Introduction
Remanufacturing is the process whereby some components of
used products are disassembled, cleaned, reprocessed, inspected,
and then reassembled to be used again. Consumer awareness,
oversight from non-governmental organizations, and legislative
pressures have encouraged manufacturers to produce green and
eco-friendly products, and thus, more and more manufacturers now
build reverse channels to recycle used products for remanufacturing.
However, rather than environmental concerns, the economic bene-
fits that accompany remanufacturing is the main consideration for
manufacturers. Because of decrements in the costs associated with
raw material production, a remanufacturing system provides an
opportunity to reduce not only the environmental burden but also
production costs. According to a recent report by Global Industry
Analysts (2010), global automotive manufacturing is growing, and
by 2015, it is forecasted to reach US$104.8 billion. Such a strong
growth in remanufacturing is also present in other industries, such
as toner and inkjet cartridges, electrical equipments, consumer
electronics, and furniture (Hauser and Lund, 2008).
In practice, it is important for manufacturers to adjust their sales
strategies in response to the introduction of remanufacturing. For
instance, the large personal computer manufacturer, HP Inc., has
adopted a remanufacturing program called ‘‘HP Renew Program’’ for
recycling and selling the remanufactured or refurbished products. Its
remanufacturing program certifies that the remanufactured products
*
Tel.: þ 886 5 5342601; fax: þ 886 5 5312073.
E-mail address: wuchan@yuntech.edu.tw
performing well and can substitute new products at lower prices, and
it also provides warranty and service for the remanufactured pro-
ducts. Thus far, not all HP’s competitors have followed suit, and
therefore, the consumers must choose between remanufactured and
new products based on product information of prices and service
offerings. In the context of this business model, a comparative
investigation of price and service for new versus remanufactured
products is useful for manufacturers as well as retailers, as it should
provide valuable insights into the interactions between price and
service, sales decisions, and performance.
To the best of our knowledge, all the previous studies examin-
ing remanufacturing are models that only consider the remanu-
factured product while ignoring the competition, or they are
competitive models with a single price attribute. In this study,
we incorporate the competitive nature of products and service
into our supply chain model of a common retailer and two
manufacturers. One manufacturer produces the new product,
and the other produces the remanufactured product under the
framework of product competition. In our model, we analyze the
effects of competition, and thus, we consider four competitive
interactions: the presence of price and service competition, price
competition only, and service competition only as well as the
absence of both price and service competition. Note that the
interaction with both price and service competition can be
viewed as a general model such that the demand functions, chain
members’ profit functions, and equilibrium decisions for other
interactions can be obtained from this competitive model.
Our analyses reveal that when remanufacturing leads to more
cost-savings, the remanufacturer will provide a higher service level
to the customers than the traditional manufacturer. Moreover,

0925-5273/$ - see front matter & 2012 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.ijpe.2012.06.034
 C.-H. Wu / Int. J. Production Economics 140 (2012) 496–507
production cost always has negative effects on the chain members’
decisions; however, the effects of the costs of recycling and service
investment on equilibrium decisions depend on the intensities of
price and service competition, especially in determining the new-
product manufacturer’s equilibrium decisions. Comparing the dif-
ferent interactions, we find that in the presence of competition, the
manufacturer has an incentive to remanufacture, yet the opposite is
the case in the absence of competition. Moreover, for the retailer,
price competition generally enhances profits from the remanufac-
tured product, and thus benefits the remanufacturer. Meanwhile,
service competition is profitable for the retailer yet detrimental to
both manufacturers. However, the remanufacturer is likely to
engage in service competition when cost-savings from remanufac-
turing are significant or recycling costs are low. Moreover, remanu-
facturing is an effective strategy in a highly price-sensitive market,
even in the absence of price competition.
The remainder of this paper is organized as follows. Section 2
surveys the related literature while emphasizing the contribution
of our work. In Section 3, we formalize price- and service-
sensitive market demands and chain members’ profit functions,
and we derive their best response functions. Then, we solve for
the member equilibrium decisions under the four competitive
interactions. Section 4 presents analytical analyses of chain
members’ equilibrium decisions with respect to the cost para-
meters, and then it describes numerical studies that examine the
effects of cost- and demand-related parameters on chain mem-
bers’ equilibrium profits. The final section concludes with a brief
summary, including suggestions for future research.
2. Literature review
This study relates to two streams of literature: one examines
the dynamics of chain members’ service decisions in the face of
service incentive demand, and the other explores supply chains
with remanufacturing. Previous studies in the first stream of
literature have concentrated on service interactions in supply
chains under game theoretical models (Bernstein and Federgruen,
2007; Cohen and Whang, 1997; De Borger and Van Dender, 2006;
Desiraju and Moorthy, 1997; Ray, 2005; Tsay and Agrawal, 2000;
Winter, 1993; Xia and Gilbert, 2007; Xiao and Yang, 2008; Zhen,
2012). Cohen and Whang (1997) used a product life cycle model to
study the sales prices and service qualities in a supply chain with a
manufacturer and a service shop. In this model, the manufacturer
sells the product as well as provides the after-sales service, while
the service shop only provides service. They adopted a time-
dependent utility function to construct market demand, and then
sequentially analyzed the price and service decisions of members.
Tsay and Agrawal (2000) studied a supply chain with two compet-
ing retailers with a common manufacturer in which both the
retailers provide products as well as service to customers. Thus,
retailers sell the same products and compete along price and
service. Xia and Gilbert (2007) focused on a supply chain model
with two substitutable products in which the product service
levels are provided by a manufacturer, and the prices are deter-
mined by a dealer (i.e., a retailer). This setting is applicable to
consumer electronics, computer devices and automobiles, which
widely adopt remanufacturing. Many models have also addressed
service competition, such as Ba et al. (2008), Bernstein and
Federgruen (2007), De Borger and Van Dender (2006), Darian
et al. (2005), Dan et al. (2012), and Kurata and Nam (2010);
however, only forward channels are examined in these studies.
More recently, studies have begun to take into account
remanufacturing as a part of production. However, these studies
have focused on price interaction within a closed-loop supply
497
chain in the absence of service interactions, and often analyzed
the recycling effort or profitability associated with remanufactur-
ing (Atasu et al., 2008; Debo et al., 2005; Ferrer and Swaminathan,
2006; Guide and Van Wassenhove, 2009; Hsueh, 2011; Liang
et al., 2009; Mitra and Webster, 2008; Pokharel and Liang, 2012;
Robotis et al., 2005; Robotis et al., in press; Savaskan et al., 2004;
Savaskan and Van Wassenhove, 2006; Vadde et al., 2011).
Savaskan et al. (2004), for instance, studied price decisions and
collection effort in a supply chain with three types of reverse
channels for remanufacturing in comparison with a centralized
system; the study examined the incentives provided to the
customer in order to improve the collection of used items in the
absence of the competition. Savaskan and Van Wassenhove
(2006) further extended the previous closed-loop supply chain
models by considering a duopolistic competition with a retailer; it
also discussed the interactions surrounding price decisions with
respect to forward and reverse channels. Atasu et al. (2008)
examined remanufacturing as a marketing strategy by consider-
ing several factors, including cost savings, green-market segment,
competition with new products, and product life cycle. The study
found that a remanufactured product is more profitable under
monopolistic competition, even in the absence of a green market
segment. Moreover, the study also pointed out that smart price
decision-making is important as the manufacturer cannibalizes
used products. A few recent studies including Atasu et al. (2008),
Debo et al. (2005), Ferrer and Swaminathan (2006), Majumder
and Groenevelt (2001), Mitra and Webster (2008), and Savaskan
and Van Wassenhove (2006) have shed light on competition in
closed-loop supply chains with remanufacturing, but they all
focus exclusively on price competition.
This paper differs from the aforementioned studies in two
aspects. First, we assume that manufacturers compete in a duopoly,
and second, we incorporate service competition between manufac-
turers. As discussed in Atasu et al. (2008), remanufactured products
usually have lower customer valuations, and thus, manufacturers
with remanufacturing (e.g. HP Inc.) may provide service (e.g.,
product information, after-sales maintenance, etc.) for customers
to stimulate sales. Moreover, the remanufactured versus new
products possess different characteristics in terms of cost structures
and interactive effects such that remanufactured products directly
relate to the amount a manufacturer invests in remanufacturing.
Thus, a study of the interactions between price and service decisions
and an analysis of profitability of these two products should provide
useful insights to supply chain members.
3. The model
Consider a supply chain comprised a manufacturer that produces
new products from raw materials, a remanufacturer1 that produces
remanufactured products from used items directly collected from
customers (Savaskan et al., 2004; Savaskan and Van Wassenhove,
2006), and a common retailer that sells the products of these two
manufacturers on the market. The two products are functionally the
same. However, the customers treat them differently as new and
remanufactured products. The retailer independently determines the
sales prices of the two products. Each manufacturer produces only
one product, and each has the opportunity to enhance demand
by bundling the product with service, such as sales effort (e.g.,
advertisement, product information) (Tsay and Agrawal, 2000) or
1
In many instances, we use ‘‘remanufacturer’’ specifically to refer to the
manufacturer producing the remanufactured products. In other instances, we refer
to both the manufacturer and the remanufacturer as the ‘‘two manufacturers.’’
Moreover, we refer to the retailer as female and the manufacturers as males.
498 C.-H. Wu / Int. J. Production Economics 140 (2012) 496–507
after-sales service (e.g., maintenance and warranty repair agree-
ments) (Cohen and Whang, 1997; Xia and Gilbert, 2007). However,
to facilitate the remanufacturing process, the remanufacturer has to
decide its recovering effort, which may lead to additional costs and
savings. We discuss costs and savings later in the model. All chain
members’ decisions must be made prior to the selling season. The
sequence of events is as follows. Let the subscript j take the values of r
and n, denoting the remanufactured and new products, respectively.
Because the production plan should be made before the sale
decisions, the remanufacturer first determines its remanufacturing
effort t, 0 r t r1, where t can be considered the portion of recovered
materials used to produce a unit product by the remanufacturer.
Then, both manufacturers choose their service package levels
sj. Finally, given the wholesale prices wj of manufacturer j, the
retailer chooses the sales prices pj for these two products, and
orders the required quantities from the two manufacturers.
Before the start of the selling season, the price and service
information for the products is announced to the market. This
scenario is common in real life, for instance, the remanufactured
and new toner cartridges are usually sold through a common
retailer (e.g., Amazon.com) in a market. In this example, the
cartridge manufacturers provide the service for their products,
and Amazon.com decides the sales prices. All product and service
information is communicated to the customers.
We assume that the manufacturers have ample capacity to
meet the retailer’s order quantity (Ferrer and Ketzenberg, 2004;
Savaskan et al., 2004; Savaskan and Van Wassenhove, 2006). This
assumption is plausible to the reality when the recovered materi-
als are common modules, which can be collected from different
types of products (e.g., aftermarket automotive parts) or from
different brands (e.g., computer parts), and when the source of
recovered materials is from popular or long-life products, for
example, XPS Inc., a remanufacturer of toner cartridges, has
sufficient capacity of remanufactured cartridges for some popular
printers (www.xps-lasercartridge.com). The manufacturers are
able to deliver the order quantities to the retailer before the
selling season. The retailer is the monopolist in the considered
market area, and other products in this market area or different
market areas under consideration, while the other products in
this market area or different market have no effect on the demand
of these two products. This assumption allows us to investigate
competition between the new and remanufactured products.
We also consider the chain members to be independent,
risk-neutral, and profit-maximizing. Moreover, the chain mem-
bers choose their decisions sequentially in a manufacturer-Stack-
elberg game (Lau and Lau, 2002; Savaskan et al., 2004; Savaskan
and Van Wassenhove, 2006; Trivedi, 1998) under a level playing
field, and they have complete information about the other members
(Cachon and Lariviere, 1999; Choi, 1991, 1996; Goyal and Netessine,
2007; Lee and Staelin, 1997; Trivedi, 1998). The notation used
throughout this paper is summarized in Appendix A.
3.1. Demand and profit functions
Let dj denote the market demand for product j A fr,ng. We
consider demand dj to be a linear function of prices and service
levels, which is commonly adopted in the literature on price
competition (Choi, 1991, 1996; Lee and Staelin, 1997; McGuire
and Staelin, 1983; Trivedi, 1998) and price and service competi-
tion (Tsay and Agrawal, 2000; Xia and Gilbert, 2007). We define
the general demand function that captures both product and
service competition as follows:
dj ¼ aj bp pj þ gp ðpk pj Þ þ bs sj gs ðsk sj Þ,
where aj , bp , bs 4 0, and gp , gs Z0, j ¼ fr,ng, and k ¼ fr,ng\j. aj
describes the market base parameterizing the potential market size
for product j when both prices at zero and no service is offered. bp
and bs represent the price and service elasticities, respectively, on
market demand. dj is downward sloping along its price pj yet
upward sloping along its service sj; i.e., the higher the price (service)
is, the lower (higher) is the demand. gp and gs measure the price and
service competition, respectively, between the new and remanufac-
tured products, and a higher gp (gs ) magnifies the influence of price
(service) competitively. As discussed in Tsay and Agrawal (2000),
lowering pj by one unit will attract bp þ gp ð@dj =@pj ¼ bp þ gp Þ more
customers with demand (dj), if all else parameters are held equal;
that is, bp is the additional customers induced from a decrease in
product j’s price, and gp ð@dj =@pk ¼ gp Þ is additional customers
diverted due to an increase in the other product’s price. Therefore,
the higher gp leads to severe price competition between the
products, and gs has similar implications in service competition.
(Refer to Tsay and Agrawal, 2000, for more details about the demand
functions with competition.)
Given market demand dj, we can formulate the members’
profit functions. The new product manufacturer carries the
production cost and service cost. The total production cost is
cdj , and the service cost is ðms2j Þ=2, where c is the unit production
cost and m is the ultimate cost of service as in Tsay and Agrawal
(2000). Therefore, the manufacturer’s profit function is
ms2n
PM
n ¼ ðwn cÞdn  : ð2Þ
2
The remanufacturer must account for collection cost, production
cost, and service cost. Following Debo et al. (2005) and Savaskan
and Van Wassenhove (2006), we assume that the recycling
process incurs a total collection cost of ðbt2 Þ=2 for the remanu-
facturer, where b is a recycling cost. Note that the quadratic cost
functions of service and collection imply the increasing marginal
costs, that is, the subsequent improvements of unit service and
collection are progressively more difficult (for example, the
manufacturer bears the higher cost to enhance the service level
from 0.8 to 0.9 than does from 0.1 to 0.2.). This means that the
chain members will target the ‘‘lowest-hanging fruit’’ (Tsay and
Agrawal, 2000) in determining service and remanufacturing
levels. Let cr be the complete remanufacturing cost, and let
d  ccr 4 0 be the cost-savings from the remanufacturing
(Atasu et al., 2008; Ferrer and Swaminathan, 2006; Savaskan
et al., 2004; Savaskan and Van Wassenhove, 2006). In practice,
cost reduction is a main reason for many manufacturers (e.g.,
Caterpillar, HP, Xerox) to engage in remanufacturing, which
provides 30–70% cost savings in comparison to the usage of
new cores (Gray and Charter, 2007). Then, the unit remanufactur-
ing cost with returned items can be expressed as
cð1tÞ þcr t ¼ cdt. Similar cost structure is also adopted in the
literature (Gupta and Loulou, 1998; Savaskan et al., 2004;
Savaskan and Van Wassenhove, 2006) in the formulation of fixed
costs and cost differences.
The remanufacturer’s profit function can be described by the
following:
ms2r bt2
PM
r ¼ ðwr c þ dtÞdr   : ð3Þ
2 2
Assume both manufacturers’ prices to the retailer wr and wn
are predetermined (Hsieh and Wu, 2009; Lee et al., 2000; Tsay
and Agrawal, 2000). Then, the retailer’s profit function PR is the
sum of the profits PRr and PRn from the remanufactured and new
products, respectively:
ð1Þ PR ¼ PRr þ PRn ¼ ðpr wr Þdr þ ðpn wn Þdn : ð4Þ
 C.-H. Wu / Int. J. Production Economics 140 (2012) 496–507
3.2. Strategic interactions
We now examine chain members’ decisions by maximizing
their profits in (2)–(4). Because the remanufacturing effort is
related to the remanufacturer’s production plan, we consider that
the remanufacturer chooses the remanufacturing effort prior to
sale decisions. Afterwards, both the manufacturers determine
their service levels, and the retailer determines the prices for
the remanufactured and new products, depending on their service
levels. Note that the proofs of the propositions presented
throughout this paper are included in Appendix A.
The following proposition characterizes chain members’ profit
functions with respect to their decisions.
Proposition 1. (i) The remanufacturer’s profit function PM r is
concave with respect to its remanufacturing effort t and service level
sr. (ii) The manufacturer’s profit function PM n is concave with respect
to its service level sn. (iii) The retailer’s profit function PR is concave
with respect to sales prices pr and pn.
Proposition 1 shows that each chain member has an optimal
choice to maximize heir profits, and this also implies that each
member has the optimal strategies in response to the decisions of
other chain members in competition. In pursuit of equilibrium
decisions, we use backward induction; that is, each chain member
formulates its best reactions, denoted by the superscript ‘‘[’’, as a
function of the decisions of the prior movers. Let the superscript
‘‘*’’ denote the equilibrium value. Up to the remanufacturer’s
equilibrium decision of t* is obtained, and all chain members’
equilibrium decisions are revealed by taking the remanufacturer’s
equilibrium decision into the best response functions for the
service levels and prices.
First let us derive the last mover’s strategy, i.e., the best
response functions of the retailer’s prices p[r ,p[n A arg maxpr ,pn PR
ðpr ,pn 9t,sr ,sn Þ. By solving the first conditions @PR =@pr ¼ 0 and
@PR =@pn ¼ 0, we obtain
ar Lp þ an gp þðsr sn Þbp gs þ wr bp ðgp þ Lp Þ þ bs ðsn gp þ sr Lp Þ
p[r ¼ ,
2bp ðgp þ Lp Þ
an Lp þ ar gp þ ðsn sr Þbp gs þwn bp ðgp þ Lp Þ þ bs ðsr gp þ sn Lp Þ
p[n ¼
2bp ðgp þ Lp Þ
Note that Lp  bp þ gp is the overall effect of the product’s price on
its demand. Focusing on the impact of service levels on the
retailers’ best response functions, we derive the first differential
of p[j with respect to the service levels, i.e., @p[j =@sj ¼ ðbs gp þ
bp Ls Þ=ð2bp ðbp þ Lp ÞÞ 4 0 and @p[j =@sk ¼ ðbs gp bp gs Þ= ð2b2p þ 4bp gp Þ,
where Ls  bs þ gs represents the overall effect of service on
demand, k aj, and j ¼ fr,ng. The higher the service level of product
j is, the higher is the sales price of product j charged by the
retailer. However, the influence of the competitor’s service level
on the sales price depends on the competition intensities gj
(j ¼ r,n). If bs gp 4 bp gs , then @p[j =@sk 40. This indicates that if the
price competition is severer (i.e., gp is greater) or service competi-
tion is milder (i.e., gs is smaller), then the higherservice level of
product k increases the sales price of product j; otherwise, the
result is reversed.
Each manufacturer’s best response functions for service
level s[j includes the retailer’s best reaction in (5); that is,
s[j A arg maxsj PM
j ðsj ,sk 9t,pr ,pn Þ,k a j and j ¼ fr,ng. Thus, solving
[ [ [
the first conditions, @ðPM [ [ M
r 9pr ,pn Þ=@sr ¼ 0 and @ðPn 9pr ,pn Þ=@sn ¼ 0,
[ [
of both manufacturers’ profits with respect to their service levels
499
results in the following:
ðwr c þ dtÞLs ðwn cÞLs
s[r ¼ and s[n ¼ : ð6Þ
2m 2m
In (6), we find that s[n is independent of t; i.e., s*n ¼ s[n . Yet, s[r is
increasing in t, meaning that the higher the remanufacturing
effort is, the higher is the service level provided by the remanu-
facturer. Moreover, if dt 4 wn wr , then s[r 4 s[n . This indicates that
the remanufacturer would provide a better service level for his
product than that offered with the new product when remanu-
facturing strategy leads to higher cost-savings.
Finally, with the best response functions for prices in (5) and
service levels in (6), the remanufacturer’s best response in terms
of his remanufacturing effort can be obtained by solving t* A
arg maxt PM
r ðt9sr ,sn ,pr ,pn Þ, which yields the equilibrium remanu-
[ [ [ [
facturing effort t* :
dð2mðar þwn gp Þ þ Ls ðcbs þwn gs Þ þwr ð2mLp L2s ÞÞ
t* ¼ 2
: ð7Þ
4bm þ d L2s
With t* in (7), we can derive all equilibrium service levels and
prices s*r , p*r , and p*n in different scenarios (i.e., gs , gp a0 presents
the presence of price and service competition, gs ¼ 0 no service
competition, gp ¼ 0 no price competition, and gs , gp ¼ 0 no price
and service competition), as shown in Table 1.
4. Analysis
We now perform further analyses of the equilibrium results.
We focus on the effects of cost- and demand-related parameters
on equilibrium decisions, and then we explore their influences on
both manufacturers’ equilibrium profits. However, due to analy-
tical intractability of chain members’ equilibrium profits, we use a
numerical approach for providing more insights.
4.1. Effects of costs on equilibrium decisions
Based on Table 1, we analyze the equilibrium decisions of the
ð5Þ remanufacturing effort, service levels, and sales prices with
respect to costs.
Proposition 2. All the equilibrium decisions t* ,s*r ,s*n ,p*r , and p*n are
:
decreasing in c.
Proposition 2 shows that greater unit production cost leads to
lower equilibrium decisions. From the proof shown in Appendix,
we observe that product cost has a direct effect on the equili-
brium service levels, yet it has an indirect effect on equilibrium
prices and remanufacturing effort. When production cost is
higher, the manufacturers will provide less service to lower costs,
and decreasing service levels decreases equilibrium prices and the
remanufacturing effort.
Proposition 3. (i) t* is decreasing in b but increasing in d. (ii) s*r is
decreasing in b but increasing in d, but s*n is independent of b and d.
(iii) p*r is decreasing in b but increasing in d. Whenever bs gp Z bp gs ,
p*n is decreasing in b but increasing in d; otherwise, p*n is increasing in
b but decreasing in d.
Proposition 3 shows that the equilibrium decision trends
behave more complexly with respect to remanufacturing-related
costs b and d than unit cost c. We observe that the remanufacturer
invests a lower remanufacturing effort in production while bear-
ing the higher cost in remanufacturing, leading to the lower
service levels provided by the remanufacturer (recall that sr is
positively related to t, as discussed before). Intuitively, the
retailer charges a lower price, as the remanufactured product
500 C.-H. Wu / Int. J. Production Economics 140 (2012) 496–507

Table 1
Equilibrium decisions under the different competition scenarios.

Scenarios Equilibrium decisions

gs , gp a 0 dð2mðar þ wn gp Þ þ Ls ðcbs þ wn gs Þþ wr ð2mLp L2s ÞÞ

tn ¼ 2
4bm þ d L2s

Ls ð4bcm þ wr ð4bm2md2 Lp Þþ d2 ð2mðar þ wn gp Þ þ ðcwn Þgs Ls ÞÞ

snr ¼ 2
2mð4bmd L2s Þ

ðwn cÞLs
snn ¼
2m

2 2
pnr ¼ ½8bm ðan gp þ ar Lp þ wr ðg2p þ L2p ÞÞ þ 2mgs ðgp ð2bc þ 2bwr þ d ðar þ wn gp ÞÞ
2 2 2
ð2bc2bwn þ d wr gp ÞLp ÞLs þ ð2md wr 2p þ 4mLp ðbc þ wr ðb þ d Lp ÞÞ
g
2 2
þ gp ð4bcm þ d ð2man þ cg2s Þwn ð4bm þ d ðg2s þ 2mLp ÞÞÞÞL2s
2 2
þ d ðc þ wn Þgp L4s =½4mðg2p L2p Þð4bmd L2s Þ

2 2 2
pnn ¼ ½8bm ðar gp þ an Lp þ wn ðg2p þ L2p ÞÞþ 2mgs ðLp ð2bc þ d ar þ wr ð2bd Lp ÞÞ
2 2
þ gp ð2bc þ wn ð2b þ d Lp ÞÞÞLs þ ð4mgp ðbc þ bwr þ d wn gp Þþ ð2mð2bc
2 2 2
2bwn þ d ðan þ wr gp ÞÞþ d ðcwn Þg2s ÞLp þ 2md wn L2p ÞL2s
2 2
þ d ðc þ wn ÞLp L4s =½4mðg2p L2p Þð4bmd L2s Þ

gs ¼ 0 dð2mar þ ðc þ wr Þb2s þ 2mðwn gp wr Lp ÞÞ

tn ¼  2 2
4bm þ d bs

bs ð2bcd2 ar d2 wn gp þ wr ð2b þ d2 Lp ÞÞ

snr ¼ 2 2
4bm þ d bs

ðwn cÞbs
snn ¼
2m

2 2 2 2
pnr ¼ ½ð4bmd bs Þgp ð2man þ ðcwn Þbs þ 2mwr gp Þ2mð4bmar þ bs ð2bc þ 2bwr
2 2 2 2 2
þ d wn gp ÞÞLp þ 4mwr ð2bm þ d bs ÞL2p =½4mð4bmd bs Þðg2p L2p Þ
2 2 2 2 2
pnn ¼ ½4mgp ð2bmar þ bðwr cÞbs þ wn ðd bs 2bmÞgp Þ þ ðð4bmd bs Þð2man þ ðwn
2 2 2 2 2 2 2
cÞbs Þþ 2md wr bs gp ÞLp þ 2mwn ðd bs 4bmÞL2p =½4mð4bmd bs Þðg2p L2p Þ

gp ¼ 0 dð2mar Ls ððc þ wn Þgs þ cLs Þ þ wr ð2mbp þ L2s ÞÞ

tn ¼  2
4bm þ d L2s

Ls ð4bcm þ wr ð4bm2md2 bp Þ þ d2 ð2mar þ ðcwn Þgs Ls ÞÞ

snr ¼ 2
2mð4bmd L2s Þ

ðwn cÞLs
snn ¼
2m

2
2bmðar þ wr bp Þþ bðcwn Þgs Ls ðbc þ wr ðb þ d bp ÞÞL2s
pnr ¼ 2
bp ð4bmd L2s Þ

1 2 2 2
pnn ¼ 2
ð8bm ðan þ wn bp Þ þ 2mð2bcd ar þ wr ð2b þ d bp ÞÞgs Ls
4mbp ð4bmd L2s Þ
2 2 2 2
ð2mð2bc þ d an þ wn ð2b þ d bp ÞÞ þ d ðcwn Þg2s ÞL2s þ d ðcwn ÞL4s Þ

gp , gs ¼ 0 dð2mar þ cb2s þ wr ð2mbp b2s ÞÞ

tn ¼ 2 2
4bm þ d bs

2 2
ð2bcd ar þ wr ð2b þ d bp ÞÞbs
snr ¼  2 2
4bmd bs

ðwn cÞbs
snn ¼
2m
 C.-H. Wu / Int. J. Production Economics 140 (2012) 496–507
Table 1 (continued )
Scenarios Equilibrium decisions
2 2
2bmar bcbs þ wr ðbbs þ bp ð2bmd bs ÞÞ
pnr ¼
bp ð4bmd2 b2s Þ
2 2
2man cbs þ wn ð2mbp þ bs Þ
pnn ¼
4mbp
bundled with the lower service level. In contrast, when remanu-
facturing results in higher cost-savings, more effort is invested in
production such that the higher service level and price are chosen
by the remanufacturer and the retailer, respectively. Note that
when d ¼ 0, the remanufacturer will abandon the remanufactur-
ing (i.e., t* ¼ 0) and behaves as a traditional manufacturer.
The equilibrium service level s*n of the new product is inde-
pendent of the remanufacturing costs, but the value of the
remanufacturer’s service level is influenced by b and d. Moreover,
the effects of d and b on p*n depend on price and service
competition. When the intensity of price competition gp is
sufficiently large (i.e., gp 4 bp gs =bs ), decreasing p*r stimulates p*r
to decrease. Alternatively, when the intensity of service competi-
tion gs is sufficiently large (i.e., gs 4 bs gp =bp ), the retailer chooses a
higher sales price of the new product. Hence, in the absence of
price competition, p*n always increases in b yet decreases in d. In
the absence of service competition, p*n decreases in b yet increases
in d. Moreover, in the absence of the price and service competi-
tion, p*n is independent of b and d.
Next, we characterize chain members’ equilibrium decisions
with respect to the investment of service m as follows:
Proposition 4. (i) , t *
s*r , s*n
are decreasing in m. (ii) Let Fr  @s*r =@m
and Fn  @sn =@m. Whenever bs p 4 ½bp ðFn s Fr Ls Þ=ðFn þ Fr Þ, p*r
*
g g
decreases in m; otherwise, p*r increases in m. Whenever
bs p 4 ½bp ðFn Ls Fr s Þ=ðFn þ Fr Þ, p*n decreases in m; otherwise, p*n
g g
increases in m.
Proposition 4 first shows that both manufacturers’ service
levels are decreasing in m in equilibrium, and in turn, the
decreasing service levels lead to a decrease in the remanufactur-
ing effort. This indicates that increasing service cost indirectly
crowds out the remanufacturer’s investment in remanufacturing.
The effects of m on equilibrium prices depend on the intensities of
competition as well as the effects Fr and Fn of m on equilibrium
service levels. It is intuitive that severe price competition stimu-
lates the retailer to choose lower equilibrium prices of the
products. Moreover, p*r and p*n behave differently with respect to
the effect of m on its equilibrium service level. If Fr is greater,
increasing m likely leads the retailer to select the smaller p*r ;
however, if Fn is greater, the retailer is likely to select the greater
p*n in response to the increasing m. Considering different interac-
tions, we find that in the absence of price interaction, both
equilibrium prices will increase in m; and in the absence of
service interaction, p*r always decreases in m, but p*n increases in m
when gp o½bp Fn =ðFn þ Fr Þ. Thus, in the scenario with the mod-
erate price interaction, greater m causes p*r to decrease and p*n to
increase, leading p*n to be less competitive than p*r .
4.2. Competitive effects on the equilibrium decisions of the
manufacturers
Regarding the effects of the competition on the two manufac-
turers’ equilibrium decisions (i.e., the remanufacturing effort and
service levels), we first consider t* trends with respect to gp and gs .
501
2 2
Proposition 5. (i) t* is increasing in gp ; and (ii) t* is increasing in gs
whenever
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
2 bmððwn cÞgs þðc þ wn 2wr ÞLs Þ
d Z qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi ;
Ls ð4mðar þ wn gp wr Lp Þðwn cÞgs Ls þ ðwn cÞL2s Þ
t* is decreasing in gs , otherwise.
Proposition 5 shows that price competition induces the rema-
nufacturer to improve his remanufacturing effort, because rema-
nufacturing leads to price advantages due to cost-savings.
However, service competition does not inevitably increase the
remanufacturing effort. If the remanufacturer has sufficient cost-
savings, service competition also improves t* ; otherwise, it
reduces t* . Hence, the remanufacturer possessing the superiority
in terms of cost-savings would choose the higher remanufactur-
ing effort when either price competition or service competition is
severer, that is, the remanufacturing is an effective competitive
advantage (as in the base example shown in Table 2).
Proposition 6. (i) s*r and s*n are increasing in gs . (ii) s*r is increasing
in gp , and s*n is independent of gp .
We intuitively observe in Proposition 6 that if the two
manufacturers engage in more intensive service competition,
they choose higher service levels. Moreover, price competition
only has an influence on the remanufacturer’s service level, which
increases in the intensity of price competition.
4.3. Comparisons between the equilibrium decisions for the two
products
One incentive of the remanufacturing is cost-savings, and thus,
we consider compare equilibrium decisions between the new and
remanufactured products with regard to cost-savings. First, in
Proposition 7, we compare the relationship between the equili-
brium prices of the two products, and we obtain a threshold for d,
p
denoted by d , below which the equilibrium price of the rema-
nufactured product is smaller than that of the new product.
Because of the lower wholesale price of the remanufactured
product, the retailer consequently chooses the lower prices,
leading the remanufactured product to be more competitive in
terms of price. However, when d exceeds the threshold, p*r is
greater than p*n . Because when the remanufacturer has superiority
in terms of cost-savings, he chooses a better service level, as
stated in Proposition 8. Then, higher service level of the remanu-
factured product mitigates by its pressure from price competition,
inducing the retailer to shift the price of remanufactured product.
Proposition 7. Let C1 ¼ an 2mar þ ðwn wr Þ½2mðgp þ Lp Þ þ Ls
ðgs þ Ls Þ and C2 ¼ ðLs ð2mgs ðar þ wn gp wr Lp Þ þ ð2man þ cg2s 2
2 3
mwr ðgp þ 2Lp þ wp
p Þffiffiffiffiffiffiffi ffiffiffiffiffiffiffi gp gs þ2mLp ÞÞLs þ ðc þ wn ÞLs ÞÞ.
n ð4m
p
If d Z d ¼ 2 C1 = C2 , pr Z pn ; otherwise, pr opn .
* * * *
s
In Proposition 8, the threshold of d for s*r Z s*n is designated by d .
502 C.-H. Wu / Int. J. Production Economics 140 (2012) 496–507

Table 2
Parameter values and the equilibrium results.

Interactions Decisions Demand Profits

t* s*r s*n p*r p*n *

dr
*
dn PM
r * PM
n * PRr * PRn * PR
*

gp ¼ gs ¼ 0 0.7155 0.4527 0.5000 3.9310 4.2000 7.1553 6.000 7.8206 8.2500 10.2393 7.2000 17.4393
gp ¼ 0, gs ¼ 3 0.7773 0.8100 0.8750 4.0545 4.3695 7.7726 6.8475 7.3145 7.9743 12.0827 9.3775 21.4602
gp ¼ 2, gs ¼ 0 0.7672 0.4612 0.5000 3.9379 4.1966 7.6724 5.5000 8.5059 7.5000 11.0324 6.5810 17.6134
gp ¼ 2, gs ¼ 3 0.8329 0.8263 0.8750 4.0767 4.3538 8.3295 6.3231 8.0158 7.1878 13.1332 8.5601 21.6934

s
Proposition 8. If d Z d , s*r Zs*n ; otherwise, s*r o s*n ; where
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
s 2 bmðwn wr Þ
d ¼ qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi :
2mðar þwn gp wr Lp Þ þ ðcwn Þgs Ls þðc þ wn ÞL2s

Remanufacturing is more effective in saving production cost,

the remanufacturer would provide a higher service level than the
s
manufacturer. This indicates that if d o d , the remanufactured
product is inferior to the new product in terms of service
s
competition. We further analyze d by taking the first derivatives
p
of d with respect to the service investment, recycling cost, and
the intensities of price and service competition, and we obtain y
s s s s Fig. 1. Influences of gp and gs on d with the different values of m(‘‘—’’: effect of gs
@d =@m 4 0, @d =@b 40, @d =@gs 40, and @d =@gp o 0. As a result,
when gp ¼ 2; and ‘‘- - -’’: effect of gp when gs ¼ 3, under the setting as ar ¼ an ¼ 25,
the remanufacturer bears higher costs in service or recycling b¼ 5, m¼ 6, c ¼1.5, d ¼ 0:5, bp ¼ 5, and bs ¼ 4.)
investments, and thus, he provides a lower service level than the
manufacturer. Moreover, when service competition is severe, the
more cost-savings are required for the remanufacturer to provide intuitively increases in the remanufacturer’s recycling cost. That
a higher service level. However, price competition behaves is, the remanufacturer will keep producing the remanufactured
s
inversely on d ; namely, the remanufacturer may wish to provide product when the cost-savings from the remanufacturing com-
y y
a higher service level than the manufacturer under more pensate for recycling cost. Setting wr ¼wn in d , we obtain d ¼ 0,
intense price competition. With the aid of Proposition 7, we know meaning that when the two manufacturers obtain equal unit
that the remanufactured product is competitive in terms of price revenues from the retailer, the remanufacturer obtains greater
competition, and thus, the fierce price competition is more profitable profits than the manufacturer, because the remanufacturer grabs
to the remanufacturer, leading to a higher service level. all the benefits from remanufacturing. Such a scenario with
identical wholesale prices is common in the real life when the
remanufacturer has the capability to produce the remanufactured
4.4. Comparisons between the manufacturers’ equilibrium profits
products as well as new products (i.e., they are indistinguishable
to the consumers), such as the case of one-time use cameras
The two manufacturers’ equilibrium profits are presented in
where remanufacturing is profitable to remanufacturers
(A.1). We investigate the relationship between the two manufac-
(Majumder and Groenevelt, 2001; Mukhopadhyay and Ma,
turers’ profit with respect to unit cost-savings. If the equilibrium
2009; Savaskan et al., 2004; Savaskan and Van Wassenhove,
profit of the remanufacturer is greater than that of the manufac-
2006).
turer, the remanufacturing strategy is more attractive to the
To provide more insight regarding price and service, Fig. 1
manufacturers. y
depicts the influences of price and service competition on d .
Proposition 9. (i) The equilibrium profit PM
r * is increasing in d, yet
As service competition becomes severer, the remanufacturer
PM y M M requires greater cost-savings from remanufacturing to gain super-
n * is decreasing in d. (ii) If d Z d , Pr * Z Pn *; otherwise,
M M ior profit as compared to the manufacturer. This indicates that
Pr * o Pn *. Note that
under the intense service competition, the remanufacturer should
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
2 bm½4mððwn cÞan ðwr cÞar Þðwn wr ÞO1  improve cost-savings by remanufacturing. Conversely, severe
dy ¼ qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
ffi, y
price competition leads d to decrease because of price advantage
4m2 ðar þwn gp wr Lp Þ2 þ ðwn cÞO2 L2s ðwn cÞ2 L4s
of the remanufactured products. Thus, remanufacturing becomes
more beneficial under more intense price competition. Moreover,
O1 ¼ 4mðwn þ wr ÞLp ðwn þwr 2cÞL2s 4cmgs , improving the service investment cost is more favorable to the
y
manufacturer than the remanufacturer, and thus, d increases
O2 ¼ 4mðan þ wr gp wn Lp Þðwn cÞg2s : with lower m.

Proposition 10. The equilibrium profit PM

r * is increasing in gp , but
As can be seen in Proposition 9, PM M
r * increases in d, yet Pn * PMn * is decreasing in gp .
decreases in d. The value of d is directly profitable to the
remanufacturer, yet it is indirectly detrimental to the manufac- Proposition 10 states that price competition is beneficial to the
turer due to price competition. The remanufacturer obtains a remanufacturer yet harmful to the manufacturer. This echoes
higher profit than the manufacturer when the unit cost-savings with Proposition 7; i.e., the remanufacturer is competitive in
y
from the remanufacturing is above a threshold d , which terms of price competition.
 C.-H. Wu / Int. J. Production Economics 140 (2012) 496–507
5. Numerical experiments
Thus far, we have investigated the closed forms of chain
members’ equilibrium decisions with respect to the parameters,
and we have compared the equilibrium decisions and profits
between the two manufacturers. Now, we turn to numerical
analyses of the parameters and competition influences on chain
members’ equilibrium profits. A selected set of parameters is as
follows: wn ¼3, wr ¼2.5, ar ¼ an ¼ 252, b¼5, m¼ 6, c¼1.5, d ¼ 0:5,
gp ¼ 2, gs ¼ 3, bp ¼ 5, and bs ¼ 4.
The results of the base example are summarized in Table 2.
Comparing the four interactions, we observe that the sales price
of the remanufactured product is lower than that of the new
product, because of the cost-savings of the remanufactured
product from remanufacturing. (From Proposition 7, we see that
p
the setting is below the threshold d ¼ 0:5 o d ¼ 0:7943.) In the
case with no price and service competition (i.e., gp ¼ gs ¼ 0), the
remanufactured product’s price competitiveness for stimulating
demand vanishes, and the remanufacturer chooses the lowest
effort in remanufacturing. Under service competition, both man-
ufacturers enhance their efforts in terms of service and thus
provide higher service levels. Moreover, we observe that s*n 4 s*r
under the four interactions, which corresponds to the results
following from Proposition 8 that d ¼ 0:5 is smaller than
ds ¼ 0:5872 with neither price nor service competition,
ds ¼ 0:5590 without price competition, ds ¼ 0:5680 without ser-
s
vice competition, and d ¼ 0:5423 with both price and service
competition. Service competition increases the retailer’s profit,
but it is harmful to the two manufacturers’ profits, because the
service costs are born by the manufacturers. However, under
price competition, the remanufactured product’s price advantage
compels the new product’s price to decrease, but the remanufac-
tured product’s price increases to gain additional revenue. Hence,
price competition increases the remanufacturer’s profit and the
retailer’s profits from the remanufactured product, but it is
detrimental to the manufacturer’s profit (as stated in
Proposition 10) as well as the retailer’s profit from the new
products. In addition, the remanufacturer’s profit is greater than
the manufacturer’s profit in the presence of price competition, but
the result is reversed in the absence of price competition. This
finding that PM M
r * 4 Pn * can be derived from Proposition 9
y
because d ¼ 0:54 d ¼ 0:3974 in the presence of price competi-
tion; however, PM M y
r * o Pn * because d ¼ 0:5o d ¼ 0:5715 in the
absence of price competition. The example reveals that chain
members’ equilibrium decisions and profits behave differently
with respect to price and service competition.
Now, we examine the effects of cost-savings, recycling cost,
service investment cost, and demand elasticities on chain mem-
bers’ profits under the four competitive interactions.
Effects of unit cost-savings d. Fig. 2 shows that as d increases,
the remanufacturer’s and retailer’s profits from the remanufac-
tured product increase, but the manufacturer’s and retailer’s
profits from the new products decrease. With the aid of
Proposition 9, the threshold d for PM M
y
r * Z Pn * can be obtained,
as shown in the figure. In addition, the presence of service
competition amplifies the effects of d. This finding indicates that
remanufacturing is more effective in improving profit; as the
cost-savings increase, the remanufactured product becomes more
competitive than the new product, and moreover, service com-
petition magnifies the remanufacturer’s superiority in terms of
cost-savings. For the retailer, increasing d is overall beneficial,
2
To avert the effects of the difference between the primary demands for the
two products, we set ar ¼ an . Note that this would not affect the trends in the
equilibrium decisions and profits with respect to the parameters.
503
because the profit increase from the remanufactured product
offsets the profit decrease from the new product. In addition, the
retailer prefers to sell the remanufactured products in the
presence of service competition.
Effects of recycling cost b. It is intuitive that increasing the
recycling cost b is detrimental to the profits of the remanufac-
tured product (i.e., PM R
r * and Pr *), and conversely, it is beneficial
to the profits from the new product (i.e., PM R
n * and Pn *), as shown
in Fig. 3. However, the positive effect of b on the manufacturer’s
profit and the retailer’s profit from the new products is insignif-
icant in the absence of service competition. Furthermore, we note
that the two manufacturers’ and the retailer’s profits for the two
products converge in b, implying that if remanufacturing is
uneconomic, the remanufacturer will abandon remanufacturing
process and acts as a traditional manufacturer.
Effects of service investment cost m. As shown in Fig. 4, in the
absence of price competition, all chain members’ profits decrease
in service investment cost m. In the presence of price competition,
the remanufacturer’s and retailer’s profits still decrease in m, but
while the manufacturer’s profit initially increases and then
decreases in m. In summary, increasing m is unfavorable not only
for the two manufacturers but also for the retailer. This is because
that the two manufacturers provide lower services to customers
under the higher m, which in turn lowers retail sales.
Effects of elasticities on demand bp and bs . From Figs. 5 and 6, we
observe that all chain members’ equilibrium profits decrease in
bp , yet they increase in bs . The retailer’s profit is more sensitive to
price and service elasticities than that of the manufacturers,
because she is closer to the market. With respect to the effects
of bp , the manufacturer’s decreasing profit rate is greater than
that of the remanufacturer. Thus, in the presence of price
competition, the remanufacturer’s profit is always higher than
the manufacturer’s profit, and in the absence of price competition,
the remanufacturer’s profit is higher than the manufacturer’s
profit as long as bp is sufficiently large. This result indicates that
the remanufacturing process enables the remanufacturer to
mitigate the negative influence of increasing price elasticity, and
moreover, even when price competition is absent, remanufactur-
ing is profitable in the face of a highly price-sensitive market. In
contrast, while all chain members’ profits increase in bs , bs does
not change the relations of the profits between the new and
remanufactured products. Namely, the manufacturer’s profit is
larger than that of the remanufacturer in the absence of price
competition, while the contrary is true in the presence of price
competition. This finding indicates that the service sensitivity of
market demand does not change the manufacturer’s attitude
regarding whether to adopt remanufacturing.
6. Summary and future research
In this study, we proposed a supply chain model with a
common retailer and two manufacturers—one manufacturer
produces a new product and the other produces a remanufactured
product. Both manufacturers provide service for their products,
and the retailer determines the prices of the products for the
market, which is incentive in terms of price and service. Four
competitive interactions are considered: no price and service
competition, price competition only, service competition only,
and both price and service competition. Furthermore, our model
enables us to examine the influences of price and service
competition on chain members’ interactions with respect to
decisions and profitabilities. Our contribution is substantive as
no prior research has considered service competition in a closed-
loop supply chain with remanufacturing. More importantly, our
504 C.-H. Wu / Int. J. Production Economics 140 (2012) 496–507

Fig. 2. Influence of cost-savings on chain members’ equilibrium profits.

Fig. 3. Influence of recycling cost on chain members’ equilibrium profits.

Fig. 4. Influence of service investment cost on chain members’ equilibrium profits.

Fig. 5. Influence of price elasticity on chain members’ equilibrium profits.

Fig. 6. Influence of service elasticity on chain members’ equilibrium profits.

results also provide guidelines for choosing marketing strategies
for price and service decisions under different interactions.
Our analysis yields the following insights. The intensities of price
and service competition affect the trends in equilibrium decisions
with respect to recycling cost and service investment, especially
for the new-product manufacturer’s equilibrium decisions. The
remanufacturer delegates more effort to remanufacturing under
competition, while the reverse is hold without competition. Price
and service have different impacts on chain members’ profits. Price
competition generally increases the remanufacturer’s and the retai-
ler’s profit from the remanufactured product because of lower cost
of that product. Service competition is profitable for the retailer yet
 C.-H. Wu / Int. J. Production Economics 140 (2012) 496–507 505

detrimental to both manufacturers; this is because service costs are p, s price and service, respectively
born by the manufacturers. However, if cost-savings are significant
and recycling cost is low, remanufacturing is an effective strategy for Superscripts
the remanufacturer under service competition with the traditional R, M retailer and manufacturers, respectively
manufacturer. Moreover, remanufacturing is also beneficial to the [ best response functions
remanufacturer under a highly price-sensitive market, even in the * Nash equilibrium
absence of price competition.
Nonetheless, this paper has made several assumptions;
relaxing these assumptions may allow us to better comprehend
the interactive dynamics in a closed-loop supply chain. For A.2. Equilibrium profits of the two manufacturers
instance, wholesale prices are considered to be predetermined,
as in the previous studies (Hsieh and Wu, 2009; Lee et al., 2000; The remanufacturer’s and manufacturer’s equilibrium profits
Tsay and Agrawal, 2000). Thus, an extension of this paper would are as follows:
be to allow the manufacturers to choose their wholesale prices, 2 2 2 2 2 2
yet this may lead the model to be very complex and, thus, PM
r * ¼ 1=ð8mð4bmd Ls ÞÞ½4m d ar þ 16bcm wr Lp
2 2
analytically intractable. Second, we assumed that the demand is 16bm w2r Lp þ 4m2 d w2r L2p
deterministic, and if the model is treated as stochastic, more 2 2
8bc mgs Ls þ 8bcmwr gs Ls 4cmd wr gs Lp Ls
findings might be obtained, for example, regarding the influence
2
of random factor of demand on the remanufacturing effort, chain þ 4bc mL2s 8bcmwr L2s
members’ interactions, and performances. Third, it is insightful to 2 2
þ 4bmwr L2s þc2 d g2s L2s þ d w2n ð2mgp þ gs Ls Þ2
2
consider the availability of collection, which may constrain the
2 2
remanufacturing and change the interaction between the pro- þ 2wn ð2mgp gs Ls Þð4bcm þwr ð4bm2md Lp Þ þ cd gs Ls Þ
ducts (Atasu et al., 2008; Ferrer and Swaminathan, 2006). Finally, 2
the power structure between the manufacturers and the retailer 4mar ðwr ð4bm þ 2md Lp Þ
2 2
should be taken into account, as it may shed lights on whether þ d wn ð2mgp þ gs Ls Þ þ cð4bmd gs Ls ÞÞ,
the current results will hold if the retailer has a greater power
than the manufacturers or if all chain members have equal PM 2 2 2
n * ¼ 1=ð8mð4bmd Ls ÞÞ½ðcwn Þ ð16bm wn Lp 8bcmgs Ls
power. 2 2
þ 4md ar gs Ls þ4md wn gp gs Ls þ4bcmL2s 4bmwn L2s
2 2 2 2
þ 2cd g2s L2s 2d wn g2s L2s 4md wn Lp L2s cd L4s
Acknowledgment
2 2
þ d wn L4s þ4man ð4bm þ d L2s Þ
The author thanks the anonymous referee for the constructive 2
4mwr ðgs ð2b þ d Lp ÞLs þ gp ð4bmd L2s ÞÞÞ:
2
ðA:1Þ
comments and suggestions that significantly enhanced the paper.
This research was supported by National Science Council, Taiwan,
ROC, under Grant #NSC-99-2410-H-224-028-MY2.
Proof of Proposition 1. (i) Assuming PM r in (3) is not a hyper-
2
bolic function; then, the inequality bm 4 d ðbs þ gs Þ2 must hold.
The Hessian matrix of PM r with respect to t and sr is
Appendix A 0 2 M 2 M1
@ Pr @ Pr !
B @t2 @t@sr C b dðbs þ gs Þ
A.1. Summary of notation HM
r ¼ @ 2 M 2 M A ¼ ,
@ Pr @ Pr dðbs þ gs Þ m
@sr @t2 @sr
Symbols

j indicator of product j A fr,ng and the determinate of the Hessian det HM 2 2

r ¼ bmd ðbs þ gs Þ 4 0,
b remanufacturer’s recycling cost M
i.e., negative definite Hessian. Hence, Pr is concave in t and sr. (ii)
c each manufacturer’s product cost The second derivative of PM in (2) with respect to sn is
n
dj market demand of product j A fr,ng @2 PM M
n =@sn ¼ m o0, and thus Pn is concave in sn. (iii) The
2
m each manufacturer’s service investment cost R
determinate of the Hessian of P in (4) is
pj retailer’s sales price of product j A fr,ng 0 2 R 1
@ P @2 PR !
sj sales level of product j A fr,ng 2ðbp gp Þ 2gp
R B @p2r @pr @pn C
wj wholesale price of product j A fr,ng det H ¼ det@ @2 PR A ¼ det
@2 PR
2
2gp 2ðbp gp Þ
@pn @pr @pn
d cost-savings from remanufacturing
t remanufacturer’s effort in remanufacturing ¼ 4bp ðbp þ 2gp Þ 4 0,
(0 r t r1)
P Profit function and hence, PR is concave in pr and pn. &
aj market base of product j A fr,ng
Proof of Proposition 2.. The parameters b are assumed to be
bp , bs price and service elasticities on market demand, 2 2
large enough so that 4bmd gs Ls d L2s Z 0. The first derivatives
respectively of the equilibrium decisions with respect to c are as follows:
gp , gs intensities of price and service competition,
respectively @t* dbs Ls
¼ 2
r0,
Lk overall effects of k A fp,sg on demand @c 4bm þ d L2s
(Lk ¼ bk þ gk ) !
d2 bs Ls
Subscripts ðbs þ gs Þ 1þ 2
@s*r 4bm þ d L2s
¼ r0,
r, n remanufactured and new products, respectively @c 2m
506 C.-H. Wu / Int. J. Production Economics 140 (2012) 496–507

@s*n b þ gs Note that @t* =@m is less than or equal to zero, except when wn is
¼ s r 0,
@c 2m extremely large. However, this extreme case is not examined in
! this paper.
d2 ðbs gp þ bp ðbs þ gs ÞÞLs The derivatives of s*r and s*n with respect to m are given by
bs ðbs þ gs Þ 1 þ 2
@p*r ðbp þ2gp Þð4bm þ d L2s Þ  
@t*
 
¼ r0, L d m t ðw cÞ
@c 4mbp @s*r @s[ @t* @s[r s
@m
r
¼ r þ ¼ r 0,
2 2 2 2
@m @t @m @m 2m2
@p*n bs ðbs þ gs Þðgp ð8bm þ d bs Ls 2d L2s Þ þ bp ð4bmd gs Ls d L2s ÞÞ
¼ r0:
@c 2
4mbp ðbp þ 2gp Þð4bmd L2 Þ @s*n @s[ @t* @s[n Ls ðcwn Þ
s ¼ n þ ¼ r 0:
@m @t @m @m 2m2
Hence, all equilibrium decisions are decreasing in c. &
The proof of (i) is completed.
Proof of Proposition 3. Let O  2mðar þwn gp Þ þ Ls ðcbs þwn gs Þ Taking the derivatives of p*r and p*n with respect to m yields
þwr ð2mLp L2s Þ. Then, t* in (7) can be simplified as
2
ðdOÞ=ð4bm þ d L2s Þ. Because t* Z 0, we obtain O r0. @p*r @p[ @s* @p[ @s* @p[
¼ r r þ r nþ r
We first consider the derivatives with respect to d. The first @m @sr @m @sn @m @m
derivative of t* with respect to d is bs gp ðFn þ Fr Þ þ bp ½Fr bs þ ðFr Fn Þgs 
¼ ,
2bp ðLp þ gp Þ
2
@t* Oð4bm þ d L2s Þ
¼ 2
Z0:
@d ð4bm þ d L2 Þ2 @p*n @p[ @s* @p[ @s* @p[
s ¼ n r þ n nþ n
@m @sr @m @sn @m @m
Taking the derivatives of s*r , s*n , p*r , and p*n with respect to d then
bs gp ðFn þ Fr Þ þ bp ½Fn bs þ ðFn Fr Þgs 
yields ¼ :
2bp ðLp þ gp Þ
 
@t*
ðb s þ gs Þ t þ d Hence, if bs gp 4½bp ðFn gs Fr Ls Þ=ðFn þ Fr Þ, p*r decreases in m;
@s*r @s[ @t* @s[r @d
¼ r þ ¼ Z 0, otherwise, p*r increases in m. If bs gp 4 ½bp ðFn Ls Fr gs Þ=ðFn þ Fr Þ,
@d @t @d @d 2m
p*n decreases in m; otherwise, p*n increases in m. The proof of (ii) is
@s*n completed. &
¼ 0,
@d
Proof of Proposition 5. Taking the first derivative of t*
@p*r @p[ @s* @p[ @s* @p[ ½bs gp þ bp ðbs þ gs Þ @s*r with respect to gp , we obtain @t* =@gs ¼ ½ð2mdðwn wr Þ= ð4bm
¼ r rþ r nþ r ¼ Z0,
@d @sr @d @sn @d @d 2bp ðbp þ 2gp Þ @d d2 L2s Þ Z 0, and thus, t* is increasing in gp , as stated in (i). Next, we
take the first derivative of t* with respect to gs :
@p*n @p[ @s* @p[ @s* @p[ ðbs gp bp gs Þ @s*r
¼ n rþ n nþ n ¼ : @t* 1 2 2
@d @sr @d @sn @d @d 2bp ðbp þ 2gp Þ @d ¼ ð4mdðbc þ d ar þ wn ðb þ d gp Þ
@gs 2
ð4bm þ d L2s Þ2
s*r and p*r are increasing in d. If bs gp Z bp gs , p*n is increasing in d; 2 3 2
þwr ð2bd Lp ÞÞLs þ d ðc þ wn ÞL3s þ dðcwn Þgs ð4bm þ d L2s ÞÞ,
otherwise, p*n is decreasing in d.
We now turn our attention to the derivatives of the equilibrium and then we derive the conditions of d by solving @t* =@gs ¼ 0. We
decisions with respect to b. The first derivative of t* with respect note that if
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
to b is 2 bmððwn cÞgs þðc þ wn 2wr ÞLs Þ
d Z qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi ,
@t* 4mdO Ls ð4mðar þ wn gp wr Lp Þðwn cÞgs Ls þ ðwn cÞL2s Þ
¼ 2
r 0:
@b ð4bm þ d L2s Þ2 t* is increasing in gs ; otherwise, t* is decreasing in gs . The proof of
The derivatives of s*r , s*n , p*r , and p*n with respect to b are as follows: (ii) is completed. &

@s*r @s[r
@t *
@s[r
dLs @t *
Proof of Proposition 6. Consider the following derivatives:
¼ þ ¼ r 0,
@b @t @b @b 2m @b
@s*r @s[ @s[ @t*
¼ r þ r ,
@s*n @gs @gs @t @gs
¼ 0,
@d
@s*n wn c
¼ 4 0,
@p*r @p[ @s* @p[ @s* @p[ dLs ðbs gp þ bp Ls Þ @t* @gs 2m
¼ r rþ r nþ r ¼ r 0,
@b @sr @b @sn @b @b 4mbp ðbp þ2gp Þ @b
2
@s*r d ðwn wr ÞLs
¼ 40,
@p*n @p[ @s* @p[ @s* @p[ dLs ðbs gp bp gs Þ @t* @gp 2
4bmd L2s
¼ n rþ n nþ n ¼ :
@b @sr @b @sn @b @b 4mbp ðbp þ 2gp Þ @b
@s*n
Contrary to the influences of d, s*r and p*r are decreasing in b. ¼ 0: ðA:2Þ
@gp
If bs gp Z bp gs , p*n is decreasing in b; otherwise, p*n is increasing
in b. & It is straightforward that s*n is increasing in gs , s*r is increasing in
gp , and s*n is independent to gp . Observing @s*r =@gs , we note that the
Proof of Proposition 4. The first derivative of t* with respect to first term of (A.2) is always positive, but the second term depends
m is as follows: on @t* =@gs . With the aid of Proposition 5, we find that @t* =@gs
2 decreases in d, we then input d ¼ 0 into (A.2), and obtain
@t* 2dLs ðd Ls ðar þwn gp wr Lp Þ2bðwr Ls wn gs cbs ÞÞ
¼ r 0: @s*r =@gs ¼ ðwr cÞ=2m 40. Hence, s*r is increasing in gs , and the
2
@m ð4bm þ d L2 Þ2 s proof is completed. &
 C.-H. Wu / Int. J. Production Economics 140 (2012) 496–507 507

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*
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