Impact of remanufacturing optimism on competitive quality choice and product-design strategy

Abstract

Research has shown that managers typically display optimistic expectations for the future. In a competitive market, remanufacturers may overestimate consumers’ willingness to pay (WTP) for remanufactured products. We develop a game-theoretic model of competition between an original equipment manufacturer (OEM) and an independent remanufacturer (IR), where the OEM determines interchangeability in product design, and the IR may have an optimistic bias about remanufacturing market demand and adopt different quality strategies. We find that the OEM is always strategic about the interchangeability design of its products. Interestingly, remanufacturing optimism triggers more significant changes in the degree of interchangeability. In some cases, the IR’s optimistic bias can lead to a win–win outcome for both firms. In addition, we find that a moderate increase in the quality of remanufactured products alleviates the weak situation in consumer quality perception. But when the WTP of remanufactured products is generally low, it is more profitable for the optimistic IR to keep the quality of remanufactured products equivalent to new products than to blindly upgrade the product quality. Our findings suggest that applying bounded rationality to issues in remanufacturing may yield new insights into the determinants of product design and quality management.