Investigating remanufacturing competition with yield uncertainty on market share, profit, and consumer surplus

• Author: Miaomiao Wang,Jun Pei,Xiaoxi Zhu,Panos M. Pardalos
• DOI: http://doi.org/10.1111/itor.12712
• Published date: 01 September 2020
• Date: 01 September 2020

Intl. Trans. in Op. Res. 27 (2020) 2584–2615

DOI: 10.1111/itor.12712

INTERNATIONAL

TRANSACTIONS

IN OPERATIONAL

RESEARCH

Investigating remanufacturing competition with yield

uncertainty on market share, profit, and consumer surplus

Xiaoxi Zhua,c, Miaomiao Wangb,JunPei

a,c,∗and Panos M. Pardalosd

aSchool of Management, Hefei University of Technology,Hefei 230009, China

bCollege of Economics and Management, Anhui Agricultural University,Hefei 230036, China

cKey Laboratory of ProcessOptimization and Intelligent Decision-making of Ministry of Education, Hefei 230009, China

dDepartment of Industrial and Systems Engineering, University of Florida, Gainesville, FL, 32611-6595, USA

E-mail: zhuxiaoxi@hfut.edu.cn [Zhu]; wangmiaomiaocome@163.com [Wang];feiyijun198612@126.com [Pei];

pardalos@ufl.edu [Pardalos]

Received 23 November2017; received in revised form 18 June 2019; accepted 4 August 2019

Abstract

Remanufacturing has been recognized both in literature and practice because of its greenness and cost

saving. Since the reproduction processes could be affected by uncertain factors, remanufacturing is much

more complex than producing new products. To investigate how yield uncertainty and market competition

affect remanufacturing decisions, we compare the results under three classical market scenarios with random

yield, that is, (a) Nash–Cournot, (b) monopoly, and (c) Stackelberg–Cournot. On comparing the expected

remanufacturing scale,expected profit, and consumer surplus, it shows that as the numberof remanufacturers

increases,the planned collection quantity of a single remanufacturer decreases, while the total expectedmarket

output increases.Furthermore, we find that the largest expected profitand expected consumer surplus brought

by marketscenarios depend on a threshold remanufacturer number. We also relax the assumptions and extend

our model to consider the scenario of mleaders and n−mfollowers in a Stackelberg game. It is interesting

to find that the first-mover advantage in profit and market share of the leader remanufacturer would be

challenged when the number of leader remanufacturersis no less than 2. The results can be potentially useful

for managerial decisions and environmental administrations.

Keywords:remanufacturing; random yield; production planning; profit; consumer surplus

1. Introduction

Quantity and pricing competition play an important role in studying market efficiency (Paul et al.,

2015; Bensoussan et al., 2016; Li et al., 2017; Tanet al., 2017). In most literature related to oligopolis-

tic competition, there is a basic assumption underlying that the production process is deterministic

and a firm’s target quantity always equals the final output. However, many manufacturing-related

∗Corresponding author.

C

2019 The Authors.

International Transactionsin Operational Research C

2019 International Federation ofOperational Research Societies

Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main St, Malden, MA02148,

USA.

X. Zhu et al. / Intl. Trans. in Op. Res. 27 (2020) 2584–2615 2585

firms suffer from yield uncertainty, and the final output might derive from the firm’s target produc-

tion quantities (Yano and Lee, 1995; Wang and Gerchak, 1996; Yan and Wang, 2013; C¸ etinkaya

et al., 2017; He et al., 2018). Typical exampleswith yield uncertainty can be found in many manufac-

turing industries such as semiconductor production. In the field of green economy, remanufacturing

is a typical industry that suffers from yield uncertainty.

With the implementation of environmental law and enhancing public environmental awareness,

more and more firms tend to choose remanufacturing (Savaskan et al., 2004; Kannan et al., 2010;

Wu, 2012; Giovanni and Zaccour, 2014; Wang et al., 2017; Ma et al., 2018). The existing literature

(Savaskan et al., 2004; Kannan et al., 2010; De Giovanni and Zaccour, 2014; Liu et al., 2019)

on remanufacturing used to assume that the reutilization rate is deterministic, while ignoring the

uncertainty during the recovery process. However, the fact is that the recovery process is affected

by many uncertain factors such as the collection quantity and especially the varying quality of

the collected used products (Li et al., 2015; Aydin et al., 2018; Min et al., 2018). Uncertainties in

collection and production arethe main factors that perplex remanufacturing industries. Our research

is motivated by a real case in a state-owned enterprise in China named “China Railway Rolling

Stock Corporation” (CRRC). CRRC focuses on producing high-speed locomotive equipment. In

CRRC, there exist several component suppliers focusing on collecting and remanufacturing certain

locomotive components and they compete in the form of oligopoly competition. The uncertainty

in the recycling process makes it complex for the remanufacturer to organize his recovery and

production planning.

Remanufacturing has been recognized with cost saving and energy efficiency. However, due to

a lack of public advertising and awareness, remanufacturing is characterized by low market de-

mand with limited number of producers. Remanufacturing decision makers are not only required

to consider the uncertainty in recycling but also required to react to the competitor’s behavior. The

system with numerous competitive manufacturers should be considered. The particularity of the

remanufacturing industry makes it suitable to model the behavior of the enterprises engaged in

remanufacturing in a local market as a Cournot type (Majumder and Groenevelt, 2001; Jung and

Hwang, 2011; Bulmus et al., 2014; Agrawal et al., 2015). Competition with uncertain yield will bring

new and different challenges compared to the scenario of deterministic yield. Therefore, it is impor-

tant and insightful to construct an oligopolistic competition model to study the remanufacturing

competition in different market structures.

This paper considers an industry that consists of n-remanufacturerscharacterized in an oligopoly

type under three typical market structures (Cournot–Nash, monopoly, and Stackelberg) in an

uncertain yield environment. The general modeling hypothesis of nplayers makes our conclusion

generally applicable. Optimal recovery decisions of the remanufacturer are derived under each

market structure. Wefocus on comparing the three models with respect to target collection quantity,

expected output of remanufactured products, expected profit, and expected consumer surplus,

which captures the efficiency of the market. We also investigate the effect of production risk upon

the equilibrium results and the remanufacturing market. The motivation for exploring the topic

originates from the following questions:

(1) What is the impact of yield uncertainty on the remanufacturers’ target production policy and

the market size of remanufacturing?

C

2019 The Authors.

International Transactionsin Operational Research C

2019 International Federation of OperationalResearch Societies

2586 X. Zhu et al. / Intl. Trans. in Op. Res. 27 (2020) 2584–2615

(2) How do the number of remanufacturers and market structure influence the results of model

comparison?

(3) Which market structure is most preferable for the remanufacturer(s) and which is best for the

consumers?

The objective of this paperis to answer the questions above.We aim to derivethe equilibrium target

production policies for the decision makers and analyze the impact of production uncertainty on

the equilibrium outcome and social welfare. Potential users of this research are managers in similar

industries or the regulation maker such as the government who can use the model in setting their

best target collection quantities or conduct the market to achieve social optimum. The advantage

of the first mover (or movers) is also investigated. The results show that the number of competitors

and market structure play an important role in studying the effect of yield uncertainty on critical

values such as the expected market output of remanufactured products and the expected consumer

surplus. The important and interesting findings of this paper are summarized as follows.

(i) In the cases of Cournot–Nash and joint monopoly, yield uncertainty decreases the planned

input of remanufacturing and the expected output of the market. However, in the Stackelberg

game, with the increasein yield uncertainty, only the planned input of the leader remanufacturer

decreases, while the planned input of the follower remanufacturer increases.

(ii) When nis greater than or equal to 3, the profitof the remanufacturer under the joint monopoly

is no longer the largest. In the case of “1 versus (n−1)” leader–follower game, the profits of

both first mover and followers will decrease when nincreases,while the scale of remanufacturing

will become larger. Another key finding is that the “first-mover advantage” no longer holds all

the time in the case of “mversus (n−m)(m≥2)” leaders–followers game with random yield.

The “first-mover advantage” cannot be obtained if the number of leaders exceeds a threshold

number.Especially, with the increase in yield uncertainty, the threshold number thatdetermines

the existence of the first-mover advantage will decrease.

(iii) For the remanufacturers, when nis less than 3, the joint monopoly mode is the best choice to

achieve the largest profit. For consumers, when nis less than 3, Cournot–Stackelberg is the

mode to obtain the largest consumer surplus, while Cournot–Nash is the best choice when nis

greater than or equal to 3.

The main contributions of this paper are as follows. In the field of remanufacturing, we apply the

oligopoly structure to study the impacts of uncertain remanufacturing processes and different mar-

ket structures on output, firm profits, and consumer surplus. The contribution of our paper to the

traditional oligopoly competition theory is that we integrate the uncertainties of remanufacturing

production into the traditional multioligopoly competition framework to analyze the equilibrium

under different market structures. When the number of remanufacturers varies or the remanufac-

turers play dynamically, innovative results are found, which are different from the classical results.

The results have important guiding significance for the operational decision of competitive reman-

ufacturer. The findings of expected market output and consumer surplus are helpful to analyze the

impact of remanufacturers competition on the related industries. For example, policymakers can

control the size of remanufacturers through market access.

C

2019 The Authors.

International Transactionsin Operational Research C

2019 International Federation ofOperational Research Societies