Intertemporal Product Management with Strategic Consumers: The Value of Defective Product Returns

Narendra Singh (), Karthik Ramachandran () and Ravi Subramanian ()
Additional contact information
Narendra Singh: Graduate School of Business, Nazarbayev University, Nur-Sultan 010000, Kazakhstan
Karthik Ramachandran: Scheller College of Business, Georgia Institute of Technology, Atlanta, Georgia 30308
Ravi Subramanian: Scheller College of Business, Georgia Institute of Technology, Atlanta, Georgia 30308

Manufacturing & Service Operations Management, 2022, vol. 24, issue 2, 1146-1164

Abstract: Problem definition : An increased incidence of quality issues, resulting in defective product returns (DPRs), is a concern for firms bringing innovative products to market. Although a firm can recover value from DPRs through refurbishing, consumers are known to act strategically in anticipation of the future availability of refurbished units. We study a firm’s strategy for offering a new product and refurbished DPRs to strategic consumers across time. Academic/practical relevance : Aided by emerging shopping tools, an increasing number of consumers consider buying refurbished versions of products rather than their new counterparts. A novel contribution of our work is the recognition of the refurbishing of DPRs as a possible solution to the time inconsistency problem that arises when a firm offers products to strategic consumers across time. We characterize how the product line decisions and profit of the firm are influenced by the defect rate, the perceived quality of refurbished DPRs, and consumers’ hassle cost of returns. Methodology : We develop a two-period game-theoretic model to characterize the firm offering the new product and refurbished DPRs to strategic consumers across time. Results : The refurbishing of DPRs helps the firm implicitly commit to limiting the quantity of the new product offered in the future, allowing the firm to charge a premium for the new product today. As a result, firm profit may even increase with the defect rate. These results persist across various model extensions. Managerial implications : Whereas the firm’s profit is the highest when there are no defects, opportunities to achieve marginal reductions in defect rates may not be worth the investment and may even be counterproductive. Also, efforts toward enhancing the perceived quality of the refurbished product or decreasing the hassle cost for consumers may better serve the firm than efforts toward marginally improving defect rates.

Keywords: defective product returns (DPRs); refurbishing; strategic consumers; time inconsistency (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/msom.2021.0972 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormsom:v:24:y:2022:i:2:p:1146-1164

Access Statistics for this article

More articles in Manufacturing & Service Operations Management from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().