Should I endorse a third party? Authorization strategies for brand manufacturers in a refurbishing market

Original equipment manufacturers (OEM) may have little or no control over third-party (3P) refurbishing firms. With the rapid growth of the refurbished market for electronic products, we study whether it is beneficial for an OEM to cooperate with a 3P via authorization schemes that boost an OEM’s brand reputations, increase their sales, and strengthen consumer acceptance of authorized 3P’s refurbished products. We examine the conditions under which both the OEM and the 3P benefit from the authorization strategy, studying the trade-off between the indirect benefit of authorizing a 3P to increase market share and the downside of cannibalizing new-product sales. To estimate our model’s behavioral parameters, we conduct an extensive experiment on MTurk to capture consumer preferences and cannibalization effects. The experimental study examines the price-perceived quality relationship along with brand value, seller identity (OEM, 3P), and product condition; its results show that the discount and seller identity play a large role in consumer choice and that cannibalization is generally linear in price. We subsequently construct a revenue maximizing model that incorporates this linear cannibalization effect, along with the authorization fees. We show that refurbished products offered by authorized 3Ps have higher demand than those that are not authorized and that it is beneficial for 3Ps to participate in these schemes despite the authorization fees. We conclude that authorization can be a win–win strategy for OEMs and 3Ps, especially when low-end consumer demand and average reduction of refurbishing costs are relatively high, and the level of cannibalization is relatively low. To achieve win–win solutions, it is important for OEMs and 3Ps to consider brand recognition, consumer behavior related to refurbished products, and remanufacturable supply.