Production-quality policy for a make-from-stock remanufacturing system

Remanufacturing capacities are constrained by the collected amount of end-of-life (EOL) products resulting in the make-from-stock model for remanufacturing industries. Remanufacturers may select quality choices in a strategic manner to improve their remanufacturing capacities. Thus, we examine a Cournot duopoly in which an original equipment manufacturer (OEM) sells new products and an independent remanufacturer (IR) remanufactures EOL products, and we determine the production quantities of low- and high-quality remanufactured products. The IR can select pure low-quality, pure high-quality, or mixed-quality policies. We formulate the dynamics between the OEM and IR in a two-period game, solve for the firms’ equilibrium quantities through dynamic programming, and derive the conditions of the remanufacturing-quality policies. Furthermore, we characterize the firms’ equilibrium decisions and analyze the parametric effects on profits, consumer surplus, and social welfare. When the availability of EOL products is sufficient, a high-quality policy is the dominant strategy for the IR and is also beneficial to both the OEM and consumers in most cases. However, when the amount of EOL products is not sufficient, the IR may choose to reduce the average quality level to obtain ample capacity; this situation is beneficial to consumers but harmful to the OEM.