The impact of secondary market competition on refurbishing authorization strategies

Secondary market where used or refurbished products are traded has attracted many independent refurbishers (IRs) to engage in refurbishing. It poses competitions for new product sales of the original equipment manufacturer (OEM) and presents new market opportunities for OEMs as well. Many OEMs have adopted refurbishing authorization as one form of cooperation. As a result, it is common that authorized refurbished products and non-authorized refurbished products coexist in the secondary market. This paper investigates a supply chain consisting of an OEM and two competing IRs. To this end, we model the decision-making processing of the OEM and two IRs as a Stackelberg game. We provide the conditions for the OEM to implement refurbishing authorization and for IRs to accept authorization. We identify that the critical trade-off is whether the indirect benefit from refurbishing authorization, such as authorization fee, can outweigh the direct cannibalization effect of the sales of refurbished products on new products sales. The comparative analyses show that the OEM can benefit from the secondary market only when the IRs gain enough profit from authorized refurbishment, and a high authorization fee is not always beneficial for the OEM.