Transportation Research Part E 87 (2016) 119

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Transportation Research Part E

journal homepage: www.elsevier.com/locate/tre

Third-party remanufacturing mode selection: Outsourcing or

authorization?
Zong-Bao Zou a,1, Jian-Jun Wang a,1, Gui-Shi Deng a,2, Haozhe Chen b,
a
b

Institute of Systems Engineering, Dalian University of Technology, No. 2 Linggong Road, Dalian 116023, PR China
College of Business, Iowa State University, 2340 Gerdin Business Building, Ames, IA 50011, USA

a r t i c l e

i n f o

Article history:
Received 28 May 2015
Received in revised form 10 November 2015
Accepted 19 December 2015

Keywords:
Remanufacturing
Third-party remanufacturer
Outsourcing remanufacturing
Authorization
Consumer surplus
Social welfare
Environment impact

a b s t r a c t
Many original equipment manufacturers (OEMs) allow third-party remanufacturers (3PRs)
to perform remanufacturing operations of branded or patented products through either
outsourcing or authorization. This study compares these two modes by modeling the game
between the OEM and the 3PR on equilibrium quantities, prices, and profits. The results
suggest that when consumers perceive the remanufactured products with a low value,
the 3PR prefers the authorization approach; otherwise the 3PR prefers the outsourcing
approach. However, in both scenarios, the OEM obtains higher profit through outsourcing
than through authorization. Our further analysis compares two modes impacts on consumer surplus, social welfare, and environment.
2015 Elsevier Ltd. All rights reserved.

1. Introduction
Compelled by environmental pollution and resource shortage, green legislations and financial instruments (e.g., green
taxation and subsidies) hold original equipment manufacturers (OEMs) to be more responsible for their operations (Sheu,
2011). Remanufacturing, which can play a central role in these environmentally conscious industrial efforts, has become
globally popular within a variety of industries (Webster and Mitra, 2007). Remanufacturing operations involve taking
end-of-life (EOL) products, bringing them back to as-new condition, and selling them again, often with the same warranty
as a new product (Atasu et al., 2010; Govindan et al., 2015). The restoring or recovering process tends to be energy-saving,
less material-consuming, and often has a lower impact on environment than manufacturing brand-new products from virgin
materials (Chen and Chang, 2012). Remanufacturing offers some very appealing potentials: enabling positive environmental
outcomes while simultaneously increasing firm profits by extracting value from used items (Galbreth et al., 2013). Many
OEMs who actively carry out remanufacturing operations have achieved satisfying results. For example, Caterpillar established a remanufacturing division which had over a business volume of $2 billion in 2007 (Ferguson and Souza, 2010). Xerox
saved 4065% manufacturing costs through its green remanufacturing program (Savaskan et al., 2004).
In practice, the majority of remanufacturing operations are performed by third-party remanufacturers (3PRs) (rsdemir
et al., 2014). However, two different options/modes exist for OEMs: outsourcing remanufacturing and authorization
Corresponding author. Tel.: +1 515 294 7216.
1
2

E-mail addresses: zzbkr123@163.com (Z.-B. Zou), drwangjj@dlut.edu.cn (J.-J. Wang), denggs@dlut.edu.cn (G.-S. Deng), hzchen@iastate.edu (H. Chen).
Tel.: +86 411 84707834.
Tel.: +86 411 84708348.

http://dx.doi.org/10.1016/j.tre.2015.12.008
1366-5545/ 2015 Elsevier Ltd. All rights reserved.

Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

remanufacturing. In the outsourcing remanufacturing operations model, a 3PR only performs the remanufacturing operations, and the marketing of the remanufactured products is still performed by the OEM itself. In the US and Europe, many
OEMs prefer to outsource remanufacturing operations (Karakayali et al., 2007). Ferguson and Souza (2010) stated that there
has been a significant trend over the last 30 years for OEMs to outsource and offshore their manufacturing operations. These
OEMs not only outsource new product manufacturing but also their remanufacturing operations to outside contractors. For
example, Land Rover and Caterpillar signed an agreement where Caterpillar Remanufacturing Services will act as Land
Rovers lead global remanufacturing services provider (The Auto Channel, 2005). In contrast, authorization remanufacturing
refers to the practice in which a 3PR acquires the proprietary rights from the OEMs to remanufacture EOL products and resell
the remanufactured products without the involvement of the OEM. Such practice has gained momentum in some developing
countries in recent years because there is increasing awareness of remanufacturings potential benefits (Wang et al., 2014).
For example, in 2010, Chinas National Development and Reform Commission (CNDRC) announced that Chinese government
would pay special attention to the development of remanufacturing industry (China Remanufacturing, 2015). As of 2013,
twenty-eight remanufacturers had been approved by CNDRC with majority of them being 3PRs, and most of them conduct
their business with the authorization remanufacturing approach (National Development and Reform Commission, 2015). In
2015, Apple signed an agreement with Foxconn in which the latter acquires the proprietary rights to remanufacture the EOL
iPhone mobile phones and remarket them in the Chinese market (Xian Civilization Network, 2015). However, it is unclear
that which of the two remanufacturing modes (outsource and authorization) is a better choice. Our literature search revealed
that extant research has not compared these two approaches and provided meaningful guidelines on how to select the most
appropriate remanufacturing mode.
In order to address this apparent research gap and advance our understanding of this topic, we use the game theory
approach to develop two alternative third-party remanufacturing modes in which the OEM can either outsource remanufacturing operations to the 3PR or authorize the 3PR to remanufacture and resell the EOL products. We analyze and compare
these two remanufacturing modes from both the OEMs and the 3PRs perspectives. In addition, we also compare consumer
surplus, social welfare, and environmental impacts related to the two modes.
The rest of this paper is organized as follows. After reviewing relevant literature in Section 2, we introduce two remanufacturing models in Section 3. Section 4 solves the equilibrium in these two models. Section 5 presents a comparison of
equilibrium results, the consumer surplus, the social welfare, and environmental impact between the two remanufacturing
modes. Additional numerical experiments are presented in Section 6, which is followed by the conclusion and implications in
Section 7.

2. Literature review
We limit our review to the literature closely related to the topic of interest. Firstly, the literature of channel selection is
pertinent to our study. Existing research of channel selection mainly focuses on the impacts of different marketing channels
or operation channels on supply chain members operations or profits. Some studies have investigated the channel selection
issue in the remanufacturing area. For example, Savaskan et al. (2004) compared three options of collecting EOL products and
found that the retailer is the most effective undertaker of EOL product collection operations. Savaskan and Van Wassenhove
(2006) later verified that such result is still valid when retailers compete on prices. Recently, Yan et al. (2015) studied two
options to market remanufactured products: marketing through the companys own e-channel or subcontracting the marketing operation to a third party. They found that both the OEM and the retailer prefer subcontracting to a third party
although marketing through its own e-channel has less environment impacts. In our paper, we also compare these two marketing options. However, the key difference between our study and their research is that in Yan et al.s (2015) study, it is the
OEM who carries out the remanufacturing operation, but in our study it is a third party who performs this operation. The
scenario in our study is a more common arrangement in practice, and we therefore believe our study has wider implications
to practices.
In addition, two other remanufacturing research streams are also relevant to our study. One is about outsourcing remanufacturing operations. Savaskan et al. (2004) found that outsourcing the EOL product collection process to a retailer is more
effective than doing it by the OEM itself or a third party. Ordoobadi (2009) presented a multi-phased decision model for
strategic analysis of outsourcing remanufacturing operation in which a comprehensive tool for effective decision making
by considering both economic and strategic factors. Karakayali et al. (2007) considered two dencentralized collection and
remanufacturing modes remanufacturer-driven channel and collector-driven channel, and identified situations in which
each mode will be the best option for the OEM. Ferguson and Souza (2010) pointed out that because many OEMs lack the
infrastructure and expertise to collect and remanufacture EOL units in a profitable manner, and thus they would outsource
the remanufacturing to outside contractors. Ferrer and Whybark (2001) described several tradeoffs between conducting
remanufacturing within an OEMs own plants or facilities and outsourcing remanufacturing to third parties. Tsai et al.
(2007) discussed cost savings resulted from the remanufacturing outsourcing decision and concluded that the more the firm
is uncertain about the costs and the inputs of materials, unit- and batch-level activities, the more it might benefit from the
information of costs transferred by the outsourcing partner (Zhu, 2015). In a scenario where the OEM outsources the recycling operation to a third party, Zhang et al. (2015) constructed a dynamic game model and demonstrated that government
subsidy to the OEM instead of the third party will improve recovery rate.

Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

The research stream that focuses on authorization remanufacturing operations is also relevant to our study. Hashiguchi
(2008) analyzed the conflicts between remanufacturing operations and patent rights protection, and concluded that courts in
the US and Japan have not tolerated acts of patent infringement in spite of their resulting recycling effects and positive
impact on the environment. Hashiguchi (2008) proposed 3PRs who purchase licenses from the OEMs can be immunized from
allegations of patent infringement. In most authorization remanufacturing operations, the OEMs charge patent license fees
from the 3PRs. Abdulrahman et al. (2015) and Peng and Su (2011) suggested the OEMs should increase remanufacturing
patent license fees to achieve an efficient allocation of excess benefit from remanufacturing operations. However,
Oraiopoulos et al. (2012) described another type of authorization remanufacturing which is widely used in the information
technology industry in the US: the OEMs charge the patent license fees from the consumers who buy the remanufactured
products. An active secondary market not only generates relicensing revenues for the OEMs but also increases the marginal
revenue of the new products.
An obvious gap of the above mentioned research is that none of the existing studies compared outsourcing remanufacturing and authorization remanufacturing simultaneously. Such comparison is important to OEMs because it will provide
meaningful results to facilitate effective decision making related to how to perform the remanufacturing operations. In addition, we also explore the effect of mode selection on the consumer surplus, social welfare, and environmental impact, which
are largely overlooked by extant research.
3. Model assumptions and notations
Based on above analysis, we consider that an OEM has two options to remanufacture its EOL products: (1) outsourcing
remanufacturing operations to a 3PR (Model O, Fig. 1a) or (2) charging patent license fees from a 3PR for remanufacturing
EOL products and marketing the remanufactured products (Model R, Fig. 1b). In Model O, the OEM only manufactures the
new products but retails both the new and remanufactured products. The remanufacturing operation is subcontracted to
the 3PR, and the OEM pays the 3PR outsourcing fee. In Model R, the OEM only manufactures and markets the new products,
and both remanufacturing and remarketing operations are performed by the 3PR. The 3PR pays money to the OEM in the
form of licensing fees. Similar to previous research (e.g., Souza, 2013; Xiong et al., 2013; Atasu et al., 2008), we assume that
the new product and remanufactured product coexist in the same market. Table 1 summarizes the key notations in this
paper.
Now we discuss the key assumptions in this study.
Assumption 1. Consumer willingness-to-pay (WTP) for a new product is heterogeneous and uniformly distributed in the
interval [0, 1]. Consumer WTP for the remanufactured product is a fraction d of their WTP for the new product.
We model consumer preference in the same way as rsdemir et al. (2014). Consumer WTP for the remanufactured products is lower than that for the new products, which represents a vertical differentiation between the two products. Much
empirical evidence has supported this notion (e.g., Guide and Li, 2010; Subramanian and Subramanyam, 2012; Hauser
and Lund, 2003; Kandra, 2002). A consumer with a willingness-to-pay / to purchase a new product has a willingness-topay d/ to purchase a remanufactured product. If the price of new products is pn , a consumer with a willingness-to-pay /
to will derive net utility ln /  pn from purchasing a new product. Thus, if / P pn , consumers will prefer purchasing
the new products. Similarly, if the price of remanufactured products is pr , a consumer with a willingness-to-pay d/ to purchase a remanufactured product will derive net utility lr d/  pr .
Assumption 1 has been widely used in other remanufacturing studies (e.g., Oraiopoulos et al., 2012; Subramanian and
Subramanyam, 2012; Souza, 2013; Xiong et al., 2013; Yan et al., 2015; Atasu et al., 2008). Similar to rsdemir et al.
(2014) and Xiong et al. (2013), we can derive below demand functions through simple integral calculations

pn  pr
;
1d
dp  pr
Qr n
:
d1  d

Qn 1 

1
2

Further, based on the demand functions, we can derive the inverse demand functions as follows:

pn 1  Q n  dQ r ;

pr d1  Q n  Q r :

Assumption 2. The cost of a remanufactured product is lower than that of a new product, i.e., cr < cn .
Because some parts and components can be reused, avoiding the need to procure them from suppliers, the process of
remanufacturing is almost always less expensive than producing a new unit of the product (Ferguson and Souza, 2010).
Through the remanufacturing operation, companies can save 4065% in manufacturing costs (Savaskan et al., 2004).

Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

OEM

OEM
po

Qr
Qn

pn

3PR

Qr

ps

pr

Qn

pn

3PR
Qr

pr

Market

Market

(a) Outsourcing Mode

(b) Authorization Mode

Fig. 1. Two remanufacturing channel modes.

Table 1
Notation summary.
Symbol

Definition

/
d

The
The
The
The
The
The
The
The
The
The
The
The
The

ln =lr
g
cn =cr
Q n =Q r
pn =pr
pO =pR
CS
SW
m
em
n =er
eun =eur
EO =ER

consumer willingness-to-pay for the new product

consumer value discount for the remanufactured product
utility from purchasing a new/remanufactured product
scaling parameter of the collection cost
unit production cost of a new/remanufactured product
quantity of a new/remanufactured product
price of a new/remanufactured product
profit of the OEM/the 3PR
consumer surplus
social welfare
environmental impact of a new/remanufactured product in production stage
environmental impact of a new/remanufactured product in use stage
total environmental impact in Model O/R

Assumption 3. The cost of collecting EOL products is convex increasing in the collected quantity. Without loss of generality,
we borrow a collection cost function 12 gkQ n 2 from previous research, where k is the collection rate and g is the scaling
parameter.
This collection cost function was widely used in previous research (e.g., Atasu and Souza, 2013; Jacobs and Subramanian,
2012; Savaskan et al., 2004).
Assumption 4. All decisions are considered in a single-period setting.
This assumption is borrowed from past research (e.g., Souza, 2013; Xiong et al., 2013; rsdemir et al., 2014; Wang et al.,
2014; Yan et al., 2015). The single period here can be viewed as the maturity stage of the products life cycle, in which prices,
demand, and recovery rates are stable. Thus, a single period model can be thought of as a slice of an infinite horizon model
when the market is stable (Atasu and Souza, 2013; rsdemir et al., 2014). This approach facilitates analytical tractability.
However, in order to ensure the validity of analysis results, we also performed a two-period setting analysis (see Appendix
B), and all the results are similar to those generated in the single-period setting.
4. Model formulation and solution
In this section, we discuss two remanufacturing modes Model O and Model R. We denote player js profit as pfj in
model f, where superscript f 2 fO; Rg stands for Model O and Model R, and subscript j 2 fO; Rg stands for the OEM and
the 3PR, respectively. We first discuss the outsourcing remanufacturing model (subsection 4.1) and then discuss the authorization remanufacturing model (subsection 4.2).
4.1. Model O outsourcing remanufacturing
In the outsourcing remanufacturing model, the OEM outsources the remanufacturing operations to the 3PR. At the same
time, the OEM pays the 3PR outsourcing fee. The OEM retains the marketing operations of new products and remanufactured
products simultaneously. It is assumed that the OEM is the Stackelberg leader and the 3PR is the follower. The sequence of

Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

events is as follows: first, the OEM determines the quantity of the new products Q n and outsourcing fee po . Sequentially,
according to outsourcing fee po the 3PR determines the return rate of EOL products k from the consumers.
The OEMs problem and the 3PRs problem are as follows respectively,

max

pOO pn Q n  cn Q n pr Q r  po Q r ;

max

pOR po Q r  cr Q r  gQ 2r :

Q n ;po

1
2

We solve the game with backward induction to guarantee the subgame perfect equilibrium. The following proposition
characterizes the equilibrium decisions.
Proposition 1. In Model O, the equilibrium quantities, outsourcing fee, and return rate can be summarized as follows:


d g  d2 dcr  d gcn
;



2 d g  d2
dcn  cr
Q r

;
2 d g  d2



gdcn 2d  2d2 g cr
;
po



2 d g  d2
dcn  cr
k

:

d g  d2 dcr  d gcn

Q n

7
8
9
10

Proof. All proofs are included in Appendix A.

An interesting point is that when the cost of remanufactured product cr increases, the OEM is likely to raise outsourcing
fee po ; but when the cost of new product cn increases, the OEM is also likely to raise outsourcing fee po .
Based on above equilibrium decisions, the corresponding equilibrium retail prices and profits can be summarized in
following corollary.
Corollary 1. In Model O, the equilibrium retail prices and profits of two partners of supply chain are given by, respectively

1 cn
;
2



d d g  d2 d1  dcr dgcn
;
Pr



2 d g  d2

pn

pO
O

11
12

1  cn 2
dcn  cr 2


;
4
4 d g  d2

13

gdcn  cr 2
pO
2 :
R

8 d g  d2

14

It can be concluded from Corollary 1 that the price of new product is not affected by the cost of remanufacturing cost cr ,
but the price of remanufactured product is affected by both the remanufacturing cost cr and manufactured cost cn . In fact,
when the OEM doesnt consider remanufacturing operation, only the new product is provided on the market. In this situation, the demand of the new product is Q n 1  pn . The profit of the OEM is given as follows pO pn  cn Q n . By simple
2

n
n
algebraic calculus, we obtain Q n 1c
, which results in pn 1c
and pO 1c4 n . When the remanufacturing operation out2
2
2
2d3g2d2 dcn cr 2
r
sources to the 3PR, the total profit of the OEM and the 3PR will increase
. Then, 4dcdn c
is allocated to the
2
gd2
8dgd2
OEM, and the other is allocated to the 3PR. The lower the remanufacturing cost, the higher the profits of the OEM and
the 3PR will be.

4.2. Model R authorization remanufacturing

In the authorization remanufacturing setting, there are two essentially antagonistic relationships between the OEM and
the 3PR. On one hand, the OEM obtains licensing revenue from the 3PR and the 3PR benefits from remanufacturing, so they
are partners. On the other hand, because remanufactured products potentially cannibalize the sales of new products, so the
OEM and the 3PR are also competitors. Therefore, the OEM will adopt appropriate remanufacturing patent license fees. Similar to the outsourcing remanufacturing model, in the authorization remanufacturing model the OEM is assumed as the
Stackelberg leader and the 3PR as the follower. The sequence of events is as follows. First, the OEM determines the quantity

Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

of new product Q n and remanufacturing patent license fee ps . Second, according to Q n and ps , the 3PR determines the return
rate of EOL products k from the consumers and the quantity of remanufactured product Q r . In this paper, we assume that
demand and return volume both are deterministic, so the quantity of remanufactured product is equal to the return volume
of EOL product. Therefore, the OEMs problem and the 3PRs problem are, respectively

max

pRO pn Q n  cn Q n ps Q r ;

max

pRR pr Q r  cr Q r  ps Q r  gQ 2r :

Q n ;ps

15
1
2

16

Similar to subsection 4.1, we solve the game with backward induction. The following proposition characterizes the
equilibrium decisions.
Proposition 2. In Model R, the equilibrium quantities, patent license fee, and return rate can be summarized as follows:

Q 
n

g 2d  d2  g 2dcn dcr
;


2 g 2d  d2

dcn  cr
Q 
;
r

2 g 2d  d2
d  cr
p
;
s
2
dcn  cr
:
k


g 2d  d2  g 2dcn dcr

17
18
19
20

Proposition 2 shows that, similar to Proposition 1, the lower the cost of remanufactured product cr or the higher the cost
of new product cn , the higher the quantity of remanufactured product and the lower the quantity of new product will be.
However, in Model R the patent license fee is not affected by the cost of new product cn . The lower the cost of remanufactured product cr , the higher the patent fee p
s .
Based on above equilibrium decisions, the corresponding equilibrium retail prices and profits can be summarized in
following corollary.
Corollary 2. In Model R, the equilibrium retail prices and profits of the OEM and the 3PR are given by, respectively

1 cn
;
2





d g 2d  d2 g dcn 1  dcr
;

p



r
2 g 2d  d2

p
n

21
22

pR
O

1  cn 2
dcn  cr 2


;
4
4 g 2d  d2

23

pR

g 2ddcn  cr 2


2 :
8 g 2d  d2

24

Corollary 2 illustrates that, similar to Model O, the price of new product is also not affected by the cost of remanufactured
product cr in Model R. However, the higher the cost of new product cn or the cost of remanufactured product cr , the
higher the price of the remanufactured product will be. When the OEM authorizes the 3PR to remanufacture the EOL
2
6d3g2d2 dcn cr 2
n cr
. Then, 4 dc
is allocated to the OEM,
product, the total profit of the OEM and the 3PR will increase
2
2dgd2
82dgd2
and the other is allocated to the 3PR. The lower the remanufacturing cost, the high the profits of the OEM and the 3PR will
be.

5. Model O vs. Model R

In this section, we first compare the equilibrium decisions and profits of the two models based on Propositions 1 and 2,
and then we analyze the resulting consumer surplus and social welfare. Finally, we discuss the environmental impacts.
5.1. Comparison of equilibrium decisions and profits


Remark 1. The equilibrium retail prices of two products satisfy pn p
n , pr > pr .

In Model O, the OEM can control the quantity of remanufactured product through outsourcing fee. In Model R, the OEM

Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

charges license fee from the 3PR to adjust the quantity of remanufactured product. Therefore, the OEM sustains a dominant
position in both models, enabling it to maintain the retail price of new product unchanged. In fact, the price of new product
will be the same as that in the setting with no remanufactured products. In Model R, the OEM and the 3PR sell the new
product and the remanufactured product to consumers respectively, so they compete with each other. Therefore, the price
of remanufactured product in Model R is lower than that in Model O.



Remark 2. The equilibrium quantities of two products satisfy Q 
n > Q n, Q r > Q r .

In Model O, the OEM and the 3PR do not compete with each other to sell the product, but in Model R, they do compete
with each other. In the presence of competition, the OEM increases the quantity of new product to reduce the market of
remanufactured product. Because the quantity of new product in Model R is larger than that in Model O, quantity increase
of new products in Model R poses a threat to remanufactured product sales. In addition, the OEM strategically sets license fee
to control the quantity of remanufactured product by the 3PR. Therefore, the 3PR produces less product in Model R than in
Model O.
Remark 3. The equilibrium return rates satisfy k > k .
In Model O, the OEM sells both new products and remanufactured products. In this situation, the OEM coordinates the
quantities of both new product and remanufactured product to maximize its profit. The OEM can impact the demand for
new product and remanufactured product by setting retail prices. Meanwhile, the OEM can also impact the 3PRs EOL product collection by setting the outsourcing fee. In the authorization remanufacturing model, the OEM and the 3PR sell the new
product and the remanufactured product to the same market respectively, so they compete with each other. In this setting,
in order to capture a bigger market share, the OEM produces more new products to prevent the remanufactured products
from cannibalizing new product sales. This leads to a higher yield of remanufactured product in Model O than that in Model
R, but the quantity of new product in Model O is lower than that in Model R. Apparently, the inequality
k > k .

Q r
Q n



> QQ r holds, i.e.,

n

R
^
Remark 4. The equilibrium profit of the OEM satisfies pO
O > pO . In addition, there exists dg 2 0:5; 1 such that if
O
R
O
^
0<d6^
dg, pR
P
p
;
otherwise,
p
<
p
,
where
d

is
the
unique
solution
to
the
equation
g2d  1  2d1  d2 0.
R
R
R
R

The potential profit of remanufactured product is associated with consumers acceptance of remanufactured product, i.e.,
d. When the d is very low, the potential profit of remanufactured product is very thin. In this situation, the OEM does not
concern the market status of remanufactured product. At this time, if the 3PR buys the license to produce and sell remanufactured products, the 3PR will gain more benefit than what it can earn through the outsourcing remanufacturing approach.
As the acceptance of remanufactured product increases, the remanufactured product starts to cannibalize new product sales
and the potential benefits of remanufactured product become substantial. As a consequence, the OEM will actively perform
the marketing operation of remanufactured product in order to capture the benefits of remanufactured product market. If
the 3PR continues to buy the license to remanufacture and market remanufactured product, the OEM tends to charge a
significant amount of license fee from the 3PR. Then, the 3PR earns less money than that under Model R.
Remark 5. When d ! 1, no matter how much cost advantage remanufacturing has, the total quantity of two products in the
n
Model O or in the Model R equal to 1c
2 .
Along with the increasing acceptance of remanufactured product, the substitutability between remanufactured product
and new product becomes evident. When d ! 1, they perfectly substitute each other. In this case, if too many remanufactured products are supplied, the prices of new product and remanufactured product will drop sharply. Consequently, both
the OEM and the 3PR would suffer losses. As discussed previously, the OEM has its advantage in controlling the supply of
remanufactured product through outsourcing fee or license fee. When d ! 1, the total quantity of two products equal to
1cn
, the total profit of the OEM and the 3PR is maximum.
2
5.2. Comparison of consumer surplus and social welfare
In this subsection, we discuss the impacts of remanufacturing mode selection on consumer surplus (CS) and social welfare
(SW). Following rsdemir et al. (2014), we denote consumer surplus and social welfare as

Z
CS

1Q n

1Q n Q r

dv  pr dv

1Q n

v  pn dv ;

25

SW pO pR CS:

26

We denote consumer surplus and social welfare as CS in Model f, where superscript f 2 fO; Rg. The following proposition
characterizes the consumer surplus and social welfare in the two models when players decisions forming a Nash
equilibriums.
f

Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

Proposition 3. The consumer surplus and social welfare in Model O and Model R are given by, respectively

CSO

1  cn 2 d1  ddcn  cr 2

2 ;
8
8 d g  d2

27

1  cn 2 d1  ddcn  cr 2


2 ;
8
8
g 2d  d2 
2
3d 3g  3d2 dcn  cr 2
31  cn
;
SW O

2
8
8 d g d2


3g 7d  3d2 dcn  cr 2
31  cn 2
:
SW R

2
8
8 g 2d  d2

CSR

28
29
30

From Proposition 3, we can find that the lager the scaling parameter g, the smaller the differences of the consumer
surplus and the social welfare in the two models will be.
Remark 6. The consumer surplus and social welfare in the two remanufacturing modes satisfy following relationships:
CSO > CSR , SSO > SSR .
Remark 6 shows that CS and SW are higher in Model O than Model R. This result has important implications for both policy makers and managers because our analysis suggests that it is of the societys better interest if the OEMs can outsource
remanufacturing to 3PRs.
5.3. Comparison of environmental impact
Following Raz et al. (2013), we consider environmental impacts of manufacturing stage and use stage. Similar to previous
research (e.g. Raz et al., 2013; Atasu and Souza, 2013; rsdemir et al., 2014), we denote the environmental impacts of manu
m
u
ufacturing stage and use stage as em
n ; en ; er and er , where subscript n and r stand for new product and remanufactured product,
subscript m and u stand for manufacturing stage and use stage respectively. According to empirical evidence (e.g., Hauser and
Lund, 2003), it is almost always the case that less energy and raw material are consumed to produce a remanufactured
product than producing a new product because some parts and components can be reused. As a result, carbon emission is less
f
m
for producing remanufactured product. Thus, we assume em
n > er . We denote environmental impact as E in Model f, where
superscript f 2 fO; Rg. The following proposition characterizes the environmental impacts in the two models.
Proposition 4. The environmental impacts in Model O and Model R are given by, respectively








u
u
dcn  cr em
d g  d2 dcr  d gcn em
n en
r er

;






2 d g  d2
2 d g 
d2




m


2
g 2d  d  g 2dcn dcr en eun dcn  cr emr eur





2 g 2d  d2
2 g 2d  d2

EO

31

ER

32

Proposition 4 shows that, similar to the consumer surplus and social welfare, the larger the scaling parameter g, the
smaller the difference of the environmental impacts in the two models will be.
em eu

Remark 7. The environmental impacts in Model O and Model R satisfy following relationships: If erm eru 6 d, then Model O is
n
n
more environmentally friendly than Model R, and vice versa.
Environmental impact is not only related to the quantity of remanufactured product but also related to the quantity of
new product. Remark 7 shows that when the acceptance of remanufactured product is low, the OEM supplies less new
products in Model O than that in Model R, and the difference in quantities of remanufactured product is small. Therefore,
authorization remanufacturing is more environmentally friendly than outsourcing remanufacturing. However, when the
acceptance of remanufactured product is high, the OEM will supply more new products to capture the market in order to
drop the quantity of remanufactured product in Model R. In this situation, outsourcing remanufacturing is more environmentally friendly than authorization remanufacturing.
6. Numerical study
In this section, we conduct several numerical studies to complement aforementioned analysis.
6.1. Parameters design
The factorial design of the following parameter values:

d 2 0:1; 0:2; 0:3; 0:4; 0:5; 0:6; 0:7; 0:8; 0:9;

cr 2 0:1; 0:2; 0:3; 0:4; 0:5; 0:6;

em
r 2 1; 2; 3; 4; 5:

Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

u
u
The other parameters are fixed: cn 0:8; g 3, em
n 6; er en 2. The difference between c n and c r measures the advanand
em
tage of remanufacturing cost, and the difference between em
n
r indicates the advantage of environmental impact for
producing a remanufactured product in the manufacturing stage. Because there is no evidence showing which product is
more environmentally friendly than the other in the use stage, we assume that environmental impact is the same in the
use stage for two products, i.e. eur eun .

6.2. Results analysis

We denote the difference between cn and cr as Dc, i.e., unit cost saving from remanufacturing, the marginal profit of
remanufactured product as Df in Model f, where superscript f 2 fO; Rg. In order to ensure the quantity of remanufactured
product to be positive and the return rate to be less than 1, we take the values d 2 0:5; 0:9; cr 2 0:2; 0:5. From Table 2,




we find that the differences between Q n and Q 
n ; Q r and Q r are significant, but the difference between pr and pr is minor,
.
The
return
rate
of
EOL
product
is
greater
in
Model
O
than
that
in
Model
R, which
and no difference exist between pn and p
n
indicates that outsourcing remanufacturing is more environmentally friendly if the EOL product is harmful to the environment. Table 3 shows that the marginal profit of remanufactured product is bigger in Model R than that in Model O. Nonetheless, the 3PR does not earn more money in Model R than Model O. On the contrary, the OEM earns more money in the Model
O than Model R. From the consumers or the societys perspective, outsourcing remanufacturing mode is the better choice.
Tables 4 and 5 discuss the impact of cost difference Dc on the decisions varies, profits, consumer surplus and social welfare.
The effect of Dc is similar to d.
Figs. 2 and 3 compare the environmental impacts between Model O and Model R. In Fig. 2, when the manufacturing stage
of remanufactured product is not more environmentally friendly than that of new product and the acceptance of remanufactured product is low, it is apparent that authorization remanufacturing mode is beneficial to the environment. On the contrary, if the manufacturing stage of remanufactured product is more environmentally friendly than that of new product and
the acceptance of remanufactured product is high, the outsourcing remanufacturing mode is good for environment.
Fig. 3 shows that remanufacturing cost cr does not make a significant influence on the environmental impact. Therefore,
when the manufacturing stage of remanufactured product is not more environmentally friendly, the authorization remanufacturing mode should be chosen as a better option. Otherwise, outsourcing remanufacturing mode should be a preferred choice.
7. Conclusions and implications
Facing the increasing natural resources shortage and tightened environmental regulations, OEMs are pressed to pay more
attention to remanufacturing operations. However, due to the lack of proper infrastructure, expertise to collect EOL products,
Table 2
The impact of d on equilibrium decisions.
d

Q n

Q 
n

Q r

Q 
r

pn

p
n

pr

p
r

k

k

0.5
0.6
0.7
0.8
0.9

0.1462
0.1389
0.1293
0.1171
0.1019

0.1467
0.1406
0.1330
0.1237
0.1128

0.0077
0.0185
0.0296
0.0411
0.0534

0.0067
0.0156
0.0243
0.0328
0.0414

0.8500
0.8500
0.8500
0.8500
0.8500

0.8500
0.8500
0.8500
0.8500
0.8500

0.4231
0.5056
0.5888
0.6734
0.7602

0.4233
0.5062
0.5899
0.6747
0.7613

0.0526
0.1333
0.2289
0.3514
0.5238

0.0455
0.1111
0.1827
0.2653
0.3667

Table 3
The impact of d on profits, consumer surplus and social welfare.
d

DO

DR

pO
O

pR
O

pO
R

pR
R

CSO

CSR

SW O

SW R

0.5
0.6
0.7
0.8
0.9

0.0115
0.0278
0.0444
0.0617
0.0801

0.0133
0.0328
0.0535
0.0755
0.0992

0.0227
0.0236
0.0253
0.0278
0.0313

0.0227
0.0234
0.0248
0.0268
0.0293

0.0001
0.0005
0.0013
0.0025
0.0043

0.0001
0.0005
0.0013
0.0025
0.0041

0.0113
0.0113
0.0113
0.0114
0.0114

0.0113
0.0113
0.0113
0.0113
0.0113

0.0340
0.0354
0.0380
0.0418
0.0470

0.0340
0.0352
0.0374
0.0406
0.0448

Table 4
The impact of unit cost saving Dc on equilibrium decisions.

Dc

Q n

Q 
n

Q r

Q 
r

pn

p
n

pr

p
r

k

k

0.3
0.4
0.5
0.6

0.0935
0.0826
0.0717
0.0607

0.0946
0.0857
0.0767
0.0678

0.0093
0.0249
0.0405
0.0561

0.0077
0.0205
0.0332
0.0460

0.9000
0.9000
0.9000
0.9000

0.9000
0.9000
0.9000
0.9000

0.6280
0.6248
0.6215
0.6182

0.6284
0.6257
0.6230
0.6203

0.1000
0.3019
0.5652
0.9231

0.0811
0.2388
0.4333
0.6792

10

Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

Table 5
The impact of unit cost saving Dc on profits, consumer surplus and social welfare.

Dc

DO

DR

pO
O

pR
O

pO
R

pR
R

CSO

CSR

SW O

SW R

0.3
0.4
0.5
0.6

0.0140
0.0374
0.0607
0.0841

0.0169
0.0450
0.0731
0.1013

0.0103
0.0120
0.0153
0.0201

0.0102
0.0116
0.0143
0.0183

0.0001
0.0009
0.0025
0.0047

0.0001
0.0009
0.0024
0.0047

0.0050
0.0051
0.0052
0.0053

0.0050
0.0050
0.0051
0.0052

0.0154
0.0180
0.0229
0.0301

0.0154
0.0176
0.0219
0.0282

O*

0.9

O*

E ,E

R**

0.8

R**

0.7
0.6
0.5
5
4
3
2

em
r

0.5

0.8

0.7

0.6

0.9

Fig. 2. The effect of em

r and d on environment impact.

O*

0.9

O*

E ,E

R**

0.85

ER**

0.8
0.75
0.7
0.65
5
0.5

4
3

em
r

0.4
2

0.3
1

0.2

cr

Fig. 3. The effect of em

r and c r on environmental impact.

and the ability to perform remanufacturing in a profitable manner, many OEMs choose to work with external 3PRs to remanufacture EOL products. To our knowledge, our study is the first to compare two possible remanufacturing modes by 3PRs
outsourcing remanufacturing and authorization remanufacturing. Utilizing the game theory approach, we conducted
analyses to answer questions such as which mode the OEMs would prefer, which mode the 3PRs would prefer, and which
mode can generate more positive outcomes for consumers and society.
Our findings are meaningful and interesting. Our comparison of the profits of the OEM and the 3PR suggests that the OEM
prefers outsourcing remanufacturing mode to authorization remanufacturing mode. However, from the 3PR perspective,
when the acceptance of remanufactured product is low, the 3PR prefers authorization remanufacturing mode; and when

Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

11

the acceptance is high, the 3PR prefers outsourcing remanufacturing mode. In reality, in well-developed Western countries
such as the US and Germany, consumers acceptance of remanufactured products is relatively high. In line with our analysis
results, major OEMs in these countries commonly adopt the approach of outsourcing remanufacturing. For example, Land
Rover outsourced its remanufacturing operations to Caterpillar (The Auto Channel, 2005). BMW outsourced the processing
of EOL vehicles in Germany to a select set of dismantlers. In most developing countries (such as China) where the acceptance
of remanufactured products is relatively low, authorization remanufacturing is a more preferred choice by 3PRs. In fact, in
order to stimulate the growth of the entire remanufacturing section, Chinese government uses regulations to encourage
authorization remanufacturing (National Development and Reform Commission, 2015). Again, this is in line with our analysis findings.
The comparison of consumer surplus and social welfare indicates that outsourcing remanufacturing mode is good for
both consumer surplus and social welfare. Also, our analysis of environmental impacts in both manufacturing stage and
use stage shows that when the acceptance of remanufactured product is low, the authorization remanufacturing is
more environmentally friendly than outsourcing remanufacturing; but when the acceptance is high, the outsourcing
remanufacturing is more environmentally friendly than authorization remanufacturing. In summary, if the acceptance
of remanufactured product is high, outsourcing remanufacturing is good for every involved member and for the
environment.
We believe our study and its results have important implications for academics, practitioners, and policy makers. From a
research standpoint, our study not only adds to existing knowledge body of the remanufacturing topic but also calls for more
future studies to explore different remanufacturing modes with a holistic view. By comparing different options in a single
study allows us to gain a better understanding of the pros and cons of each decision. To managers, our study results provide
a useful tool and guideline to assess different remanufacturing modes in different scenarios. More specifically, out study suggests that consumers acceptance of remanufactured products plays an important role in such process. From a policy makers
perspective, our findings suggest that government agencies (particularly the ones in developing countries) can utilize the
research findings to take proactive actions. For example, desired positive social outcomes can be achieved through governments regulations on remanufacturing operations or effective purchasing incentives to enhance consumers acceptance of
remanufactured products.
Acknowledgments
This research was supported by the National Natural Science Foundation of China (71271039, 71372083), New Century
Excellent Talents in University (NCET-13-0082), the Foundation for Innovative Research Groups of the National Natural
Science Foundation of China (71421001), the Fundamental Research Funds for the Central Universities (DUT14YQ211).
Appendix A
Proof of Proposition 1. In this paper, we consider deterministic demand and return, so the quantity of EOL products
collected by the 3PR equals to the demand of remanufactured product, i.e., Q r kQ n . Substituting Q r kQ n into (6), we can
rewrite 3PRs problem as follows:

max
k

1
2

pOR kQ n po  cr  gkQ n 2 :

A1

Because the second-order sufficient condition, i.e., d

the optimization in Eq. (A1) provides

pOR =dk2 < 0 is negative, the profit function pOR is concave in k. Performing

po  cr
:
gQ n

A2

Anticipating the 3PRs response to outsourcing fee po , the OEM chooses Q n and po to maximize its profit. Substituting Eq. (A2)
into (A1), we rewrite OEMs problem as follows:


max
Q n ;po

pOO 1  Q n  d

po  cr


 


p  cr
p  cr
 po o
 cn Q n d 1  Q n  o
:

The first- and second- order derivatives of

A3

pOO with respect to Q n and po are as follows:

@ pOO
p  cr
1  2Q n  2d o
 cn ;
@Q n
g

A4

 




@ pOO
p  cr
1
d
p  cr
 po
d 1  2Q n  o

1 o
;
@po
g
g
g
g

A5

12

Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

@ 2 pOO
@Q 2n

2 < 0;

@ 2 pOO
@ 2 pOO
2d

 ;
@Q n @po @po @Q n
g


2 O
@ pO
dg 1
2
< 0:
g g
@p2o
The determinant of the Hessian matrix according to




 2
 2d



g 

jHj  2d
 4 d g  d2 =g2 > 0:
2dg 

g  g2

Therefore, the profit function

obtain

pOO with respect to Q n and po is as follows:

pOO is concave in Q n and po . Letting Eqs. (A4) and (A5) to 0 and solving simultaneously, we


gdcn 2d  2d2 g cr
;


2 d g  d2



d g  d2 dcr  d gcn
;
Q n



2 d g  d2

po

A6
A7

Then, substituting Eqs. (A6) and (A7) into (A2), we obtain the 3PRs optimal return rate

k

dcn  cr
:

d g  d2 dcr  d gcn

A8

Lastly, substituting Eqs. (A7) and (A8) into Q r kQ n , the equilibrium quantity of remanufactured product is:

dcn  cr
Q r

:
2 d g  d2

A9

The proof of Proposition 1 is completed. 

Proof of Corollary 1. Substituting Eqs. (A7) and (A9) into Eqs. (3) and (4), the equilibrium prices of two products are given as
follows:

1 cn
;
2



d d g  d2 d1  dcr dgcn
:
pr



2 d g  d2

pn

A:10
A:11

Then, substituting Eqs. (A6)(A.11) into profits functions of the OEM and the 3PR, the equilibrium profits are obtained as
follows:

pO
O

1  c n 2
dcn  cr 2


;
4
4 d g  d2

gdcn  cr 2
pO
2 :
R

8 d g  d2
The proof of Corollary 1 is completed. 
Proof of Proposition 2. Proof of Proposition 2 is similar to that of Proposition 1, so we omit the proof process. 
Proof of Corollary 2. Proof of Corollary 2 is similar to that of Corollary 1, so we omit the proof process. 
Proof of Remark 1. From the Corollaries 1 and 2, we have the result

pn p
n

1 cn
:
2

Comparing the price of remanufactured product

d2 1  ddcn  cr
pr  p


 > 0;
r

2 g 2d  d2 d g  d2

A:12
A:13

13

Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

We obtain the result, i.e., pr > p

r . 
Proof of Remark 2. Comparing the quantity of new product under two alternative modes of remanufacturing

d2 dcn  cr

Q 


 > 0;
n  Qn

2 g 2d  d2 d g  d2

it shows that Q 
n > Q n.
In the same way, we compare the quantity of remanufactured product under the alternative modes of remanufacturing

ddcn  cr
Q r  Q 


 > 0:
r

2 d g  d2 g 2d  d2
Therefore, it is clearly that Q r > Q 
r . 
Proof of Remark 3. From the Eqs. (10) and (20), we obtain the return rate differential

k  k

dcn  cr


g 2d  d2  g 2dcn dcr

dcn  cr


:

d g  d2 dcr  d gcn







Because g 2d  d2  g 2dcn dcr  d g  d2 dcr  d gcn d1  cn > 0, we have k > k . 
Proof of Remark 4. Firstly, compare the profit of the OEM under the alternative modes of remanufacturing




dcn  cr 2

dcn  cr 2




 > 0;
4 d g  d2
4 g 2d  d2

pOO  pRO

R
which illustrates pO
O > pO .
Then, compare the profit of the 3PR under the alternative modes of remanufacturing

O
pR
R  pR



d2 dcn  cr 2 2d1  d2 g1  2d

:


2

2
8 g 2d  d2 d g  d2

A:14

Denote a function as

g d 2d1  d2 g1  2d:

A:15

It is evident that g d > 0 when d 2 0; 0:5. The first order derivative of g d with respect to d is as follows:

@g d
21  3d1  d  2g:
@d

A:16

Clearly, when d 2 0:5; 1; @g@dd < 0, which illustrates that g d monotonically decreases with respect to d when d 2 0:5; 1. In
addition, we find g 0:5 0:25 > 0; g 1 g < 0. Therefore, there is unique solution ^
dg such that 2d1  d2

g1  2d 0.

In summary, when the acceptance of remanufactured product is such that 0 < d 6 ^

dg;
R
acceptance of remanufactured product is such that ^
dg 2 0:5; 1; pO
R > pR . 
Proof of Remark 5. Because

lim Q n lim
d!1

d!1


d g  d2 dcr  d gcn g cr  1 gcn

;



2g
2 d g  d2

dcn  cr
dcn  cr
;
lim Q r lim


d!1
d!1 2 d g  d2
2g



g 2d  d2  g 2dcn dcr g 1  g 2cn cr
lim Q 

;



n lim
d!1
d!1
2g 1
2 g 2d  d2
dcn  cr
cn  cr
lim Q 
;

r lim

d!1
d!1 2 g 2d  d2
2g 1

pR
P pO
R
R , and when the

14

Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

We obtain the result as follows:


lim Q n lim Q r lim Q 
n lim Q r
d!1

d!1

d!1

d!1

1  cn
:
2

Proof of Proposition 3. Substituting Eqs. (3) and (4) into Eq. (25), we can rewrite the consumer surplus as follows:

CS

dQ 2r Q n 2dQ r Q n
:
2

A:17

Then, substituting Eqs. (7) and (8) into Eq. (A.17), the consumer surplus under outsourcing remanufacturing is obtained as
follows:

1  cn 2 d1  ddcn  cr 2

2 :
8
8 d g  d2

CSO

At last, adding up

SW O

A:18

O
O
pO
O ; pR and CS , we obtain the social welfare as follows:


3d 3g  3d2 dcn  cr 2
31  cn 2
:

2
8
8 d g  d2

A:19

In the same way, we can easily obtain the consumer surplus and social welfare under authorization remanufacturing as follows, respectively,

1  cn 2 d1  ddcn  cr 2


2 ;
8
8 g 2d  d2



3g 7d  3d2 dcn  cr 2
31  cn 2

2
8
8 g 2d  d2

CSR
SW R

A:20


A:21

Proof of Remark 6. Comparing the consumer surplus and social welfare under the alternative modes of remanufacturing

CSO  CSR

SW

O

 SW

R


d2 1  d 2g 3d  2d2 dcn  cr 2
> 0;


2

2
8 d g  d2 g 2d  d2



d 2g 5d  2d2 dcn  cr 2




2 > 0;
8 d g  d2 g 2d  d2

Which show that CSO > CSR ; SW O > SW R . 

Proof of Proposition 4. In this paper, we consider the environmental impact of product in manufacturing stage and using
stage. Therefore, the environmental impacts can be written as follows:



m

u
u
E Q n em
n en Q r er er :

A:22

Substituting Eqs. (7) and (8) into (A.22), we can obtain the environmental impact of outsourcing remanufacturing as follows:

EO








u
u
d g  d2 dcr  d gcn em
dcn  cr em
n en
r er

:






2 d g  d2
2 d g  d2

A:23

With the same method, the environment impact of authorization remanufacturing is obtained as follows:

ER



g 2d  d2  g 2dcn dcr emn eun dcn  cr emr eur




 :
2 g 2d  d2
2 g 2d  d2

A:24

Proof of Remark 7. Comparing the environmental impacts under the alternative modes of remanufacturing

EO  ER



m

u
u
ddcn  cr em
r er  d en en
:






2 d g  d2 g 2d  d2

A:25

Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

15

em eu

It is evident that when erm eru 6 d, the outsourcing remanufacturing mode is more environmentally friendly than Model R, and
n

vice versa. 
Appendix B
B.1. Two-period models
In the two-period setting, raw materials of the remanufactured products are the EOL products in the first period. Thus, we
rewrite Assumption 3 as follows:
Assumption 3. The cost of collecting EOL products is convex increasing in the collected quantity. Without loss of generality,
we borrow a collection cost function 12 gkQ 1 2 from previous research, where k is the collection rate and g is the scaling
parameter.
In this section, we consider a two-period model. In the first period, the OEM manufactures and sells new product. In the
second period, the OEM and the 3PR manufacture new product and the manufactured product, respectively. Depending on
whether or not the 3PR sells the remanufactured product, we consider two scenarios: outsourcing remanufacturing and
authorization remanufacturing. In the first period, the demand function Q 1 1  p1 , where p1 is the price of the new product
n pr
sold in the first period. In the second period, the demand functions of new and remanufactured product are Q n 1  p1d
pn pr
pr
and Q r 1d  d , where pn and pr are the price of new and remanufactured product, respectively.
B.1.1. Model O outsourcing remanufacturing
The OEMs problem and the 3PRs problem are, respectively

max

Q 1 ;Q n ;po

max
k

p2O
O p1  c n Q 1 pn  c n Q n pr  po Q r
1
2

2
p2O
R po  c r kQ 1  gkQ 1

B1

B2

The first item in (B1) is the profit to sell the new product in the first period. The second item and the third item in (B1) the
profits to sell the new product and the remanufactured product, respectively. The return rate of EOL product in single-period
model is k Q r =Q n , but in the two-period model the return rate is k Q r =Q 1 . It is assumed that the OEM is the Stackelberg
leader and the 3PR is the follower. The sequence of events is as follows: first, the OEM determines the quantity of the new
product Q 1 in the first period. Then, the OEM determines the quantity of the new product Q n and outsourcing fee po . Finally,
the 3PR determines the return rate of EOL products k from the consumers.
We solve the game with backward induction to guarantee the subgame perfect equilibrium. The following proposition
characterizes the equilibrium decisions.
Proposition 1. In Model O, the equilibrium quantities, outsourcing fee, return rate and can be summarized as follows:

1  cn
;
2



d g  d2  d gcn dcr
;

Q 2O



n
2 d g  d2



dgcn 2d g  2d2 cr
;
p2O


o
2 d g  d2
dcn  cr
k2O


:
1  c n d g  d2
Q 2O
1

B3
B4
B5
B6

Proof. The 3PRs problem is

max
k

1
2

2
p2O
R po  c r kQ 1  gkQ 1 :

B7
2

Because the second-order sufficient condition, i.e., d

ing the optimization in Eq. (B7) provides

kpo ; Q 1

po  cr
:
gQ 1

2
2O
p2O
R =dk < 0 is negative, the profit function pR is concave in k. Perform-

B8

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Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

Anticipating the 3PRs response to outsourcing fee po and Q 1 , the OEM chooses Q 1 , Q n and po to maximize its profit. Substituting Eq. (B8) into (B1), we rewrite OEMs problem as follows:

 

p2O
O 1  Q 1  c n Q 1 1  Q n  c n Q n d 1  2Q n 

max

Q 1 ;Q n ;po

The first- and second- order derivatives of

po  cr


 po

po  cr

p2O
O with respect to Q 1 ; Q n and po are as follows:

@ p2O
O
1  2Q 1  cn ;
@Q 1
@ p2O
p  cr
O
1  2Q n  cn  2d o
;
@Q n
g
@ p2O
dg1  2Q n  2d gpo 2d gcr
O

;
@po
g2
@ 2 p2O
O
@Q 21
@ 2 p2O
O
@Q 2n

B9

B10
B11
B12

2;
2;

@ 2 p2O
2d g
O

;
@p2o
g2
@ 2 p2O
@ 2 p2O
@ 2 p2O
@ 2 p2O
O
O
O
O

0;
@Q 1 @Q n @Q n @Q 1 @Q 1 @po @po @Q 1
@ 2 p2O
@ 2 p2O
2d
O
O

 :
@Q n @po @po @Q n
g
The Hessian matrix according to the

@ 2 p2O
O

6
6 2 2O
6 @ pO
H 6 @Q @Q
6 n 1
4 2 2O
@Q 21

@ pO
@po @Q 1

@ 2 p2O
O
@Q 1 @Q n
@ 2 p2O
O
@Q 2n

@ 2 p2O
O
@po @Q n

p2O
O is as follows:

3
2
2
0
0
7
7
7
7 6
@ 2 p2O
0
2
 2d
O
g 7
76
5:
4
@Q n @po 7
2dg
5
0  2d

2
@ 2 p2O
g
g

@ 2 p2O
O
@Q 1 @po

@p2o

Due to

jH1 j 2 < 0;


 2 0 
 4 > 0;
jH2 j 
0 2 


 2
0
0 






8 d  d2 g
2
 2d



< 0;
jH3 j  0
g 
g2

2dg 
2d
 0  g  g2 
the profit function

pOO is concave. Letting Eqs. (B10)(B12) to 0 and solving simultaneously, we obtain

1  cn
2



d g  d2  d gcn dcr
2O
Qn



2 d g  d2



dgcn 2d g  2d2 cr
;
p2O


o
2 d g  d2
Q 2O
1

B13
B14
B15

Then, substituting Eqs. (B13)(B15) into (B8), we obtain the 3PRs optimal return rate

k2O

dcn  cr


:
1  c n d g  d2

The proof of Proposition 1 is completed. h

B16

Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

17

Note: Compared with the single-period model, the quantities of new product and remanufactured product in second

2O

period in the two-period model are same as the quantities in the single-period model, i.e., Q 2O
n Q n ; pr pr . In addition,
2O

the equilibrium quantities of new product satisfy Q 2O
1 > Q n Q n.
Based on above equilibrium decisions, the corresponding equilibrium retail prices and profits can be summarized in
following corollary.

Corollary 1. In the Model O, the equilibrium retail prices and profits of two partners of supply chain are given by,
respectively

1 cn
2O
p2O
;
1 pn
2



2
d d g  d d1  dcr dgcn
;
p2O



r
2 d g  d2

p2O
O

B17
B18

1  cn 2
dcn  cr 2


;
2
4 d g  d2

B19

gdcn  cr 2
p2O
2 :
R

8 d g  d2

B20

Proof. Firstly, substituting Eqs. (B13) and (B16) in Q r kQ 1 , the equilibrium quantity of remanufactured product is obtained
as follows:

dcn  cr
Q 2O
:
r

2 d g  d2

B21

n pr
n pr
Then, substituting Eqs. (B13), (B14) and (B21) into Equations Q 1 1  p1 ; Q n 1  p1d
and Q r p1d
 pdr , equilibrium
prices are given as follows:

1 cn
2O
p2O
;
1 pn
2



2
d d g  d d1  dcr dgcn
p2O
;



r
2 d g  d2
At last, substituting the results obtained into

p2O
O

B22
B23

pOO and pOR , the equilibrium profits of the parties are as follows:

1  cn 2
dcn  cr 2


;
2
4 d g  d2

gdcn  cr 2
p2O
2 :
R

8 d g  d2

B24
B25

The proof of Corollary 1 is completed. 

1cn
2O
Note: The prices of the new product in the two models are all equal, i.e., pn p2O
1 pn 2 . In fact, when the OEM only
n
provides new product in the market, the price is also 1c
. The quantities of new product and remanufactured product in the
2
second period are same as those in Model O when a single period is considered.

B.1.2. Model R authorization remanufacturing

The OEMs problem and the 3PRs problem are, respectively

max

Q 1 ;Q n ;ps

max
k

p2R
O p1  c n Q 1 pn  c n Q n ps Q r ;
1
2

2
p2R
R pr  c r  ps kQ 1  gkQ 1 :

B26
B27

The sequence of events is as follows. First, the OEM determines the quantities of new product Q 1 and Q n and remanufacturing patent license fee ps . Second, the 3PR determines the return rate of EOL products k.
Similar to Model O, we solve the game with backward induction. The following proposition characterizes the equilibrium
decisions.

18

Z.-B. Zou et al. / Transportation Research Part E 87 (2016) 119

Proposition 2. In Model R, the equilibrium quantities, patent license fee, and return rate can be summarized as follows:

1  cn
;
2



g 2d  d2 dcr  g 2dcn
;

Q 2R



n
2 g 2d  d2
d  cr
p2R
;
s
2
dcn  cr
k2R

:

g 2d  d2 1  cn
Q 2R
1

B28
B29
B30
B31

Proof of Proposition 2 is similar to those of Proposition 1, so we omit the proof process.

Based on above equilibrium decisions, the corresponding equilibrium retail prices and profits can be summarized in following corollary.
Corollary 2. In Model R, the equilibrium retail prices and profits of two partners of supply chain are given by, respectively

1 cn
2R
p2R
;
1 pn
2





d g 2d  d2 g dcn 1  dcr
2R
pr
;



2 g 2d  d2

B32
B33

p2R
O

1  cn 2
dcn  cr 2


;
2
4 g 2d  d2

B34

p2R
R

g 2ddcn  cr 2


2 :
8 g 2d  d2

B35

Proof of Corollary 2 is similar to those of Corollary 1, so we omit the proof process.

1cn
2O
Note: similar to the Model O, the prices of the new product in the two models are all equal, i.e., pn p2O
1 pn 2 .
Moreover, the quantities of the new product and remanufactured product in the second period are same as those in Model
R when single period is considered.

B.2. Model O vs. Model R

Because the price and quantity of new product are both same in the first period and the prices and quantities of new product and remanufactured product are also same as those in the single-period models, results of comparing the equilibrium
decisions and profits which have been obtained in the single-period will keep constant in two-period setting. Moreover, the
conclusions about the consumer surplus, social welfare and environmental impact also have almost no change. Thus, we will
not repeat these procedures.
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