Production, Manufacturing and Logistics Competitive advantage through take-back of used products Hans S. Heese * , Kyle Cattani, Geraldo Ferrer, Wendell Gilland, Aleda V. Roth The Kenan–Flagler Business School, The University of North Carolina at Chapel Hill, Chapel Hill, NC 27599-3490, USA Received 14 January 2002; accepted 7 November 2003 Available online 1 February 2004 Abstract Motivated by a recent antitrust ruling against Hill–Rom, one of the two dominant American suppliers of hospital beds, we develop a stylized model to investigate the consequences of used product take-back on firms, industry and customers. Our findings suggest that by taking back and reselling refurbished products, a manufacturer can increase both profit margins and sales––to the detriment of a non-interfering competitor. In our model, customers are always better off under product take-back, but it depends on the degree of competition, whether firms use the benefits of take- back primarily to increase their margins or to pass them on to the customers by lowering their prices. The first firm to offer take-back, in some cases, can deter its competitors from following this profitable strategy, especially if it has an existing advantage in terms of lower production cost or higher market share. Contrary to the claim of Hill–RomÕs competitor, we find a ‘‘legitimate business justification’’ for Hill–RomÕs reduction of new product prices. Ó 2003 Elsevier B.V. All rights reserved. Keywords: Supply chain management; Product take-back; Secondary markets of durable goods; Remanufacturing 1. Introduction Secondary markets for used goods are of high importance for manufacturers of durable goods. Con- sider, for example, the automobile industry. In 1996 there were twice as many transactions in the market for used cars as in the market for new ones (Hendel and Lizzeri, 1999). Secondary markets allow access to consumers that cannot afford a new product and provide current owners an outlet to dispose of products that still have market value (Purohit, 1992). Manufacturers also profit from the existence of a smoothly functioning secondary market because it allows benefits from customer segmentation and increasing de- mand for new goods that often outweighs the losses caused by substitutive effects (Levinthal and Purohit, 1989). In most research on secondary markets and product durability, the manufacturerÕs participation in the secondary market (e.g. through buy-backs or trade-ins) assumes scrappage of returned goods. However, it has been shown for various cases that remanufacturing/refurbishing is not only environmentally efficient, * Corresponding author. Tel.: +1-919-962-8747; fax: +1-919-962-6949. E-mail address: seb@unc.edu (H.S. Heese). 0377-2217/$ - see front matter Ó 2003 Elsevier B.V. All rights reserved. doi:10.1016/j.ejor.2003.11.008 European Journal of Operational Research 164 (2005) 143–157 www.elsevier.com/locate/dsw