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International Journal of Production Research

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Pricing and remanufacturing decisions in two

competing supply chains
a b
Jie Wei & Jing Zhao
a
General Courses Department, Military Transportation University, Tianjin, P.R. China.
b
School of Science, Tianjin Polytechnic University, Tianjin, P.R. China.
Published online: 02 Sep 2014.

To cite this article: Jie Wei & Jing Zhao (2014): Pricing and remanufacturing decisions in two competing supply chains,
International Journal of Production Research, DOI: 10.1080/00207543.2014.951088

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 International Journal of Production Research, 2014
http://dx.doi.org/10.1080/00207543.2014.951088

Pricing and remanufacturing decisions in two competing supply chains

Jie Weia∗ and Jing Zhaob
a General Courses Department, Military Transportation University, Tianjin, P.R. China; b School of Science, Tianjin Polytechnic
University, Tianjin, P.R. China
(Received 18 April 2013; accepted 29 July 2014)

This paper considers the pricing and remanufacturing decisions in a duopoly market with two competing supply chains,
which compete at both manufacturer and retailer levels. There are one manufacturer and one retailer in each supply chain,
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one manufacturer produces the new product directly from raw material, while the other manufacturer has incorporated
a remanufacturing process for used product into the original production system. Based on different industry organisation
structures and the chain members’ competing forms, five game decision models are established to explore the chain members’
optimal strategies on price and/or remanufacturing, and the corresponding equilibrium solutions are obtained. Finally, we
carry out the sensitivity analysis through numerical studies of some key parameters for examining their influences on the
pricing decisions and chain members’ maximum profits. On the basis of comparison and analysis, some managerial insights
are derived.
Keywords: pricing; remanufacturing; game theory; competing supply chains

1. Introduction
The environment is increasingly burdened by the industrialisation and the population growth. The consumer awareness,
oversight from non-governmental organisations, and legislative pressures have encouraged manufacturers to produce green
and eco-friendly products, and thus, more and more manufacturers now build reverse channels to recycle used products for
remanufacturing (Wu 2012). Remanufacturing is the industrial process in which used, end-of-life products are restored to
like-new conditions and put back into the distribution system like the ‘new products’. Remanufacturing process may offer
companies a unique opportunity to improve their profits on one hand, and on the other hand, to serve social responsibility.
In some industries, equipment manufacturers manage the product collection process in parallel with the distribution of new
products. For instance, Xerox has been a leader in reusing their high-value, end-of-lease copiers in the manufacturing of new
copiers that meet the same strict quality standards (Savaskan and Van Wassenhove 2006). Similar activities are undertaken
by Hewlett Packard Corporation for computers and peripherals, and by Canon for print and copy cartridges.
With the development of technology and the globalisation of economy, competition exists not only among different chain
members, but also at the chain level, resulting in the chain-to-chain competition in many industries. For example, in the
telecom industry (particularly the mobile telecom industry), Microsoft (software supplier) and HTC (device manufacturer)
may form a supply chain which competes with the supply chain with Symbian (software supplier) and Nokia (device
manufacturer). Other examples include the Canadian coffee shop market, fast food, car manufacturing and retailing, and
crude oil and gasoline industries. Obviously, with this competition, either an upperstream firm or a downstream firm in one
chain competes against not only his/her corresponding firm in the other chain, but also the entire other chains. Moreover, in
such circumstances, the performance of any firm in the chain will depend on the performance of the entire chain.
This article studies the pricing and remanufacturing decisions in two supply chains which compete in the market under
a static (single period) setting. Each supply chain is comprised of one manufacturer and one retailer. In one supply chain,
the traditional manufacturer produces the new product directly from raw material. In the other chain, the manufacturer has
adopted a remanufacturing process for used product into the original production system, so that he can manufacture a new
product directly from raw material, or remanufacture part or whole of a returned unit into a new product. The two products
produced by the two manufacturers are competitive and substitutable. The two supply chains are either centralised (i.e. two
manufacturers sell their own products to the market directly), or decentralised (i.e. two manufacturers sell their products
to the market through the two retailers, respectively). In the centralised case, both the manufacturers need to determine
the retail prices to the consumers and the manufacturer with remanufacturing need to make the remanufacturing decision.

∗ Corresponding author. Email: weijie2288@163.com

© 2014 Taylor & Francis

 2 J. Wei and J. Zhao

In the decentralised case, both the retailers determine the retail prices to the consumers, and the two manufacturers determine
the wholesale prices to the retailers. Moreover, the manufacturer with remanufacturing needs to make the remanufacturing
decision. We explore the two chain members’ pricing and remanufacturing decisions under various competing forms, and
analyse the effects of chain members’ different competing forms on their optimal decisions. We also study that how the
industry or a chain will be better off if one or two chains in the industry are centralised or decentralised, and how the industry
or a chain will be better off when one of the two chains in the industry adopts the remanufacturing process for used product
into the original production system. There are both academic and practical values to consider pricing and remanufacturing
decisions in competing supply chain, and this is an interesting topic focused by managers.
This research is related to the literature rooted in the remanufacturing reverse logistics. In the last few years, the
remanufacturing supply chain has gained much attention, and quite a large number of researches have been done about
it (Savaskan, Bhattacharya, and Van Wassenhove 2004; Debo, Totkay, and Van Wassenhove 2005; Wee and Chung 2009;
Wei, Zhao, and Li 2012; Wei and Zhao 2013). For example, Guide and Van Wassenhove (2006) discussed assumptions of
models for reverse supply chain activities, and in particular operational issues for remanufacturing and remanufactured product
market development. Savaskan, Bhattacharya, and Van Wassenhove (2004) addressed the problem of choosing the appropriate
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reverse channel structure for the collection of used products from customers, and they modelled the problem as decentralised
decision-making systems with the manufacturer being the Stackelberg leader. Wei, Zhao, and Li (2012) studied the pricing
problem for a closed-loop supply chain with one manufacturer and one retailer in a fuzzy environment. Wee and Chung
(2009) developed an integrated deteriorating production inventory model with green component design, remanufacturing
and JIT deliveries. Robotis, Bhattacharya, and Van Wassenhove (2005) showed that resellers could increase their profits
significantly by adding value of remanufacturing and making the used products more attractive to customers. Guide, Teunter,
and Van Wassenhove (2003) focused on determining the optimal acquisition and selling price for a manufacturer who
procures used products that belong to different quality classes and have different remanufacturing costs. Debo, Totkay, and
Van Wassenhove (2005) studied a multi-period model with one original equipment manufacturer and one or more independent
remanufacturers. They identified conditions under which a monopolist will invest in technologies to make a product suitable
for remanufacturing, and they identified how these conditions change when independent remanufacturers enter the market to
compete with the manufacturer. A detailed review of the research related to remanufacturing reverse logistics can be found
in the studies by Fleischmann et al. (1997) and Dekker et al. (2004). Differing from those of prior studies, the focus of this
research is the pricing and remanufacturing decisions in two competing supply chains.
Our research is also related to the literature rooted in the chain-to-chain competition. There are only a limited number of
papers that examine the chain-to-chain competition. For example, Wu, Baron, and Berman (2009) investigated the equilibrium
behaviour of two competing supply chains in the presence of demand uncertainty. Anderson and Bao (2010) considered the
chain-to-chain competition in which different manufacturers sell through exclusive retailers that compete for end customers.
Xiao and Yang (2008) developed a price–service competition model of two supply chains to investigate the optimal decisions
of players under demand uncertainty. Trivedi (1998) found that the competitions at both retailer and manufacturer levels
have significant impacts on the members’ profits and prices. McGuire and Staelin (1983) considered two competing supply
chains where each manufacturer must decide whether to integrate into retailing or sell their products through an exclusive
retailer via a wholesale price contract. Coughlan (1985) extended the research of McGuire and Staelin (1983) to a more
general demand function and applied it to the international semiconductor industry. However, to the best of our knowledge,
no research has studied the chain-to-chain competition with remanufacturing decision. Our paper tries to fill this research
gap.
Our main contribution is exploring the firms’ optimal pricing and remanufacturing decisions of two competing supply
chains by considering the industry organisation structures and the chain members’ competing forms. We establish five game
models by considering different industry organisation structures and chain members’ different competing forms. The optimal
decisions and maximal profits of the chain members are obtained in five game models. We also carry out the sensitivity
analysis through numerical studies of some key parameters for examining their influences on the chain members’ optimal
decisions and maximal profits. On the basis of comparison and analysis, some managerial insights are derived. For example,
we find that (i) the remanufacturer will spend the highest remanufacturing effort when the two supply chains are centralised,
(ii) the leader–follower relationships of competing supply chains affect the remanufacturer’s remanufacturing effort, (iii) the
remanufacturer will spend more remanufacturing effort when the leadership of the competitive supply chain is possessed by
the retailer than by the manufacturer, (iv) the industry holds advantage in getting the higher profit when the two retailers are
the leaders in the two competing supply chains, (v) the end consumers are better off when the two competing supply chains
are centralised.
The rest of this paper is organised as follows. In Section 2, the problem description is presented. Five decision models
and the corresponding analytical results are discussed in Section 3. Section 4 is dedicated to illustrate the results of proposed
 International Journal of Production Research 3

models. Finally, the conclusion including summary of the main results and some directions for future research is given in
Section 5.

2. Problem description
Consider two supply chains (labelled chain 1 and chain 2) which compete in the market with two substitutable products
(product 1 and product 2) under a static (single period) setting. Chain 1 is composed of manufacturer 1 and retailer 1, and chain
2 is composed of manufacturer 2 and retailer 2. In the following discussion, ‘he’ represents one of the two manufacturers,
and ‘she’ represents one of the two retailers. The manufacturer 1 is a traditional manufacturer who produces a product
(product 1) directly from raw material with unit manufacturing cm1 . The manufacturer 2 has incorporated a remanufacturing
process for used product into his original production system, that is to say, he can manufacture a new product (product 2)
not only directly from raw material with unit manufacturing cost cm2 , but also from part or whole of the used product with
unit remanufacturing cost cr . In the single-period static setting, the manufacturer 2 can maximise his profit by choosing an
arbitrary production quantity of the remanufactured product. This implicitly assumes that the number of returned products
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for remanufacturing is unconstrained.

We consider product categories in which there is no distinction between remanufactured and manufactured products
made by manufacturer 2, a similar assumption is made in Savaskan, Bhattacharya, and Van Wassenhove (2004), Savaskan
and Van Wassenhove (2006) and Choi, Li, and Xu (2013). There are many examples in the field of remanufacturing, one
industrial case is the high-value copiers of Xerox in which the used copiers are collected directly by Xerox as new ones are
installed. The Kodak line of single-use cameras is the other case. Most consumers did not know the reality that their newly
bought cameras contain ‘remanufactured parts’, even though it was clearly stated on the packaging (Atasu, Guide, and Van
Wassenhove 2010).
The manufacturer 2’s reverse channel performance is characterised by τ , the remanufacturing effort for product 2.
τ can be considered the fraction of current generation product 2 supplied from returned and thus remanufactured units, i.e.
0 ≤ τ ≤ 1. Then, the average unit manufacturing cost for product 2 can be expressed as cm2 (1 − τ ) + cr τ or cm2 − δτ (where
δ = cm2 − cr > 0, which denotes the cost-savings from the remanufacturing). We assume that the recycling process incurs a
2
total collection cost, which is characterised as a function of the remanufacturing effort of used products and is given by Bτ2 ,
where B is a scaling parameter (Savaskan, Bhattacharya, and Van Wassenhove 2004; Savaskan and Van Wassenhove 2006;
Wu 2012).
We suppose that the market demand Di for product i is a general linear demand function of its own sale price pi and the
substitutable product’s sale price p j , i = 1, 2, j = 3 − i, which is commonly adopted in the literature (McGuire and Staelin
1983; Lee and Staelin 1997; Trivedi 1998; Choi 1991, 1996; Wu 2012; Zhao et al. 2012). The general demand function is
given as follows
Di = ai − βpi + γ p j , i = 1, 2, j = 3 − i, (1)
where the parameter ai represents the market base of product i, the parameter β is self-price elastic coefficient and γ is the
cross-price elastic coefficient. The parameters β and γ denote the measure of the responsiveness of each product’s market
demand to its own sale price and to its competitive product’s sale price, respectively, and satisfy β > γ > 0, which means
that the demand for a product is more sensitive to the changes in its own sale price than to the changes in the sale price of
the other competitive product. This assumption is reasonable in reality.
In this paper, we consider two types of decisions of the two supply chains: one is the centralised decision and the other
is decentralised decision. In centralised decision case, each supply chain is operated by a centralised controller (manager)
with the intent to maximise the total profit of the whole supply chain. Both the decisions of the retailer and the manufacturer
are fully coordinated, and the wholesale price wi is viewed as inner transfer price, which only influences the profit of each
participant, but not on the total chain profit, and thus will be neglected. Manager 1 must determine the retail price p1 for
product 1, manager 2 must determine the retail price p2 and the remanufacturing effort τ . In decentralised decision case, the
manufacturer i wholesales the product i to the retailer i with unit wholesale price wi , and then the retailer i sells it to the
end consumer with unit retail price pi , i = 1, 2. The manufacturer i and the retailer i must make their decisions in order
to achieve their own maximal profits, respectively. Manufacturer 1 must determine the wholesale price w1 for product 1,
manufacturer 2 must determine the wholesale price w2 and the remanufacturing effort τ . The retailer i must determine the
retail price pi for product i, i = 1, 2.
Different from the dynamic multi-period setting where the quantity of the remanufactured product in the next period
is subject to the availability of the returned used-products in the current period, under a single-period static setting, the
(re-)manufacturing system is unconstrained and myopic, that assumes an abundant supply of returned products and does not
consider the effect of current pricing decisions on the future profit stream generated by the remanufactured product.
 4 J. Wei and J. Zhao

In order to investigate the effect of varying the level of price competition on the profits and decisions of the supply chain
participants, we consider the situation in which the competing supply chains all have the same structure in this paper. In other
words, we study the case in which integrated chains only compete with integrated chains or decentralised chains compete
with decentralised chains. Moreover, we assume that all chain members are independent, risk-neutral and behave as if they
have perfect information of the demands and the cost structures.
According to the above description, we can formulate the chain members’ profit functions as follows. The two retailers’
profit functions are

πr 1 = ( p1 − w1 )(a1 − βp1 + γ p2 ), (2)

πr 2 = ( p2 − w2 )(a2 − βp2 + γ p1 ). (3)

The two manufacturers’ profit functions are

πm1 = (w1 − cm1 )(a1 − βp1 + γ p2 ), (4)

Bτ 2
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πm2 = (w2 − cm2 + δτ )(a2 − βp2 + γ p1 ) − . (5)

2
For the sake of clarity, the notations used to formulate our problem are listed in Appendix 1.

3. Analytical results
In this section, we first analyse the decisions of the centralised supply chains as a benchmark and establish the centralised
decision model (CD model). Then we consider four decentralised decision cases based on different power structures among
manufacturers and retailers, and establish the corresponding decision models using Stackelberg game. Specifically, (1) the
MOMT model where the two manufacturers are leaders and the two retailers are followers in two supply chains; (2) the
RORT model where the two manufacturers are followers and the two retailers are leaders in two supply chains; (3) the MORT
model where the manufacturer 1 is a leader and the retailer 1 is a follower in chain 1, and the retailer 2 is a leader and the
manufacturer 2 is a follower in chain 2; (4) the ROMT model where the manufacturer 2 is a leader and the retailer 2 is a
follower in chain 2, and the retailer 1 is a leader and the manufacturer 1 is a follower in chain 1. Such modelling enables us
to capture the chain members’ competitive dynamics under different power structures. The leader in every decision scenario
makes his/her decision to maximise his/her profit, conditioned on the follower’s response. The problem is solved backwards.
Namely, the decision of the follower is solved first, given that the leader’s decision has been observed.

3.1 The CD model

As a performance benchmark, we first develop a model for the centralised supply chains where a single decision-maker
determines all decisions to maximise the total profit of each supply chain. Specifically, manufacturer 1 produces product 1
with a unit manufacturing cost cm1 and sells it to the consumer with retail price p1 , and manufacturer 2 produces product 2
directly from raw material with unit manufacturing cost cm2 , or remanufactures part or whole of a returned unit into a new
product 2 with unit remanufacturing cost cr , and then sells product 2 to the consumer with unit retail price p2 . Thus, the
profit of each centralised supply chain can be expressed as follows

πc1 ( p1 ) = ( p1 − cm1 )(a1 − βp1 + γ p2 ), (6)

Bτ 2
πc2 ( p2 , τ ) = ( p2 − cm2 + δτ )(a2 − βp2 + γ p1 ) − . (7)
2
In the centralised scenario, one ‘super’ manager determines p1 to maximise the profit πc1 ( p1 ) of chain 1, and the other
‘super’ manager determines p2 and τ to maximise the profit πc2 ( p2 , τ ) of chain 2, respectively. So, we establish the CD
model for the centralised scenario as follows.
⎧
⎨ max πc1 ( p1 )
p1
⎩ max πc2 ( p2 , τ )
p2 ,τ

Proposition 1 In the CD model, chain 1’s optimal retail price denoted as pc1 ∗ , and chain 2’s optimal retail price and
∗ ∗
optimal remanufacturing effort denoted as pc2 and τc , respectively, are given as
 International Journal of Production Research 5
a1 + βcm1
∗ 2βγ B(a2 + βcm2 ) − 2a2 β 2 γ δ 2 + (a1 + βcm1 )(B − βδ 2 )γ 2
pc1 = + , (8)
2β 2β(2β 2 (2B − βδ 2 ) + γ 2 (βδ 2 − B))
∗ 2β B(a2 + βcm2 ) − 2a2 β 2 δ 2 + (a1 + βcm1 )(B − βδ 2 )γ
pc2 = , (9)
2β 2 (2B − βδ 2 ) + γ 2 (βδ 2 − B)
a2 δ βδ ∗ γδ ∗
τc∗ = − pc2 + p . (10)
B B B c1
Proof Proof of Proposition 1, as well as the other remaining Proofs of the Propositions in this article, appears in
Appendix 3.

3.2 The MOMT model

The MOMT model arises in the markets where two retailers retail two substitutable products (e.g. copiers), and each retailer’s
power is smaller compared to her manufacturer’s. For example, manufacturers (e.g. Lenovo and Xerox) play a more dominant
role than their small- and medium-sized agents. In these real-world supply chains, the manufacturers will act as the Stackelberg
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leaders and the retailers will act as the Stackelberg followers in their own chains. In this case, the manufacturers first make their
decisions simultaneously, and then the retailers make their decisions simultaneously. Specifically, manufacturer 1 announces
the wholesale price w1 and manufacturer 2 announces the wholesale price w2 and remanufacturing effort τ , simultaneously.
Then retailer 1 announces the retail price p1 and retailer 2 announces the retail price p2 , simultaneously. The MOMT model
is given as follows.
⎧⎧
⎪
⎪ ⎨ max πm1 (w1 , p1∗ (w1 , w2 , τ ), p2∗ (w1 , w2 , τ ))
⎪
⎪ w1
⎪
⎪
⎪ ⎩ max πm2 (w2 , τ, p1∗ (w1 , w2 , τ ), p2∗ (w1 , w2 , τ ))
⎪
⎨ w2 ,τ
p1∗ (w1 , w2 , τ ), p2∗ (w1 , w2 , τ ) are derived from solving the following problem
⎧
⎪
⎪
⎪
⎪ ⎨ max πr 1 ( p1 )
⎪
⎪ p1
⎪
⎪
⎩ ⎩ max πr 2 ( p2 )
p2

We first derive the two retailers’ best response functions given earlier decisions w1 , w2 and τ made by the two
manufacturers. By setting ∂πr 1 ( p1 )/∂ p1 and ∂πr 2 ( p2 )/∂ p2 to zero and solving for p1 and p2 simultaneously, the two
retailers’ best response functions can be derived as follows.
2β 2 βγ 2βa1 + γ a2
p1∗ (w1 , w2 , τ ) = w1 + 2 w2 + , (11)
4β 2 − γ 2 4β − γ 2 4β 2 − γ 2
βγ 2β 2 2βa2 + γ a1
p2∗ (w1 , w2 , τ ) = w 1 + w2 + . (12)
4β 2 − γ 2 4β 2 − γ 2 4β 2 − γ 2
It follows from Equations (11) and (12) that ∂ pi∗ (w1 , w2 , τ )/∂wi > 0, ∂ pi∗ (w1 , w2 , τ )/∂w j > 0, ∂ pi∗ (w1 , w2 , τ )/
∂ai > 0, ∂ pi∗ (w1 , w2 , τ )/∂a j > 0, ∂ pi∗ (w1 , w2 , τ )/∂β < 0, ∂ pi∗ (w1 , w2 , τ )/∂γ > 0, i = 1, 2, j = 3 − i. These mean that,
in the MOMT decision case, (i) the retailer i  s optimal retail price will increase when the two manufacturers’ wholesale prices
increase, (ii) the retailer i  s optimal retail price will increase when the market bases a1 and a2 increase, (iii) the retailer i  s
optimal retail price will increase when the parameter γ increases, (iv) the retailer i  s optimal retail price will decrease when
the parameter β increases. So, we have the following Insight 1.
Insight 1 In the MOMT case, the retailer i  s optimal retail price increases with the two manufacturers’ wholesale
prices, the market bases and the parameter γ , and the retailer i  s optimal retail price decreases with the parameter β.
Having the information about the response functions of the two retailers, the two manufacturers would then use them to
maximise their profits simultaneously. Substituting Equations (11) and (12) into the two manufacturers’ profit functions, i.e.
Equations (4) and (5), and applying the first-order conditions to the resulting profit functions, the optimal wholesale prices
∗
wmomt1 ∗
, wmomt2 , and the optimal remanufacturing effort τmomt ∗ can be derived as follows

∗ A3 (A5 A6 − B A4 ) − A1 (B A2 − A25 )
wmomt1 = , (13)
A23 (B − δ A5 ) − A2 (B A2 − A25 )
∗ A1 A3 (δ A5 − B) − A2 (B A4 − A5 A6 )
wmomt2 = , (14)
A23 (B − δ A5 ) − A2 (B A2 − A25 )
∗
A6 + δ A3 wmomt1 ∗
− A5 wmomt2
∗
τmomt = , (15)
B
 6 J. Wei and J. Zhao
β(2βa1 + γ a2 ) + βcm1 (2β 2 − γ 2 ) 2β(2β 2 − γ 2 ) β2γ β(2βa2 + γ a1 ) + βcm2 (2β 2 − γ 2 )
where A1 = 4β 2 − γ 2
, A2 = 4β 2 − γ 2
, A3 = 4β 2 − γ 2
, A4 = 4β 2 − γ 2
,
βδ(2β − γ )
, A6 = βδ(2βa 2 + γ a1 )
2 2
A5 = 4β 2 − γ 2 4β 2 − γ 2
.
From Equations (11)–(15), we can easily see that the two retailers’ equilibrium retail prices in the MOMT model, denoted
∗
as pmomt1 ∗
and pmomt2 , respectively, are

∗ 2β 2 βγ 2βa1 + γ a2
pmomt1 = w∗ + w∗ + , (16)
4β 2 − γ 2 momt1 4β 2 − γ 2 momt2 4β 2 − γ 2

∗ βγ ∗ 2β 2 2βa2 + γ a1
pmomt2 = w momt1 + w∗ + , (17)
4β 2 − γ 2 4β 2 − γ 2 momt2 4β 2 − γ 2
∗
where wmomt1 ∗
and wmomt2 are defined as in Equations (13) and (14) respectively.
Proposition 2 In the MOMT model, manufacturer 1’s equilibrium wholesale price wmomt1 ∗ is given in Equation (13),
∗
manufacturer 2’s equilibrium wholesale price wmomt2 and equilibrium remanufacturing effort τmomt ∗ are given in Equations
∗ ∗
, pmomt2
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(14) and (15), respectively, and the two retailers’ equilibrium retail prices pmomt1 are given in Equations (16) and
(17), respectively.

3.3 The RORT model

The RORT model arises in the markets where two retailers retail two substitutable products (e.g. copiers), and each retailer’s
power is larger compared to her manufacturer’s. For example, retailers (e.g. WalMart and Tesco) play a more dominant
role than their suppliers/manufacturers (e.g. Lenovo and Xerox). In these real-world supply chains, the retailers will act as
the Stackelberg leaders and the manufacturers will act as the Stackelberg followers in their own chains. In this case, the
two retailers first make their decisions simultaneously, the two manufacturers then make their decisions simultaneously.
Specifically, retailer 1 announces the retail price p1 and retailer 2 announces the retail price p2 simultaneously, then
manufacturer 1 announces the wholesale price w1 and manufacturer 2 announces the wholesale price w2 and remanufacturing
effort τ simultaneously. The RORT model is given as follows
⎧⎧
⎪ ⎪ max πr 1 ( p1 , w1∗ ( p1 , p2 ), w2∗ ( p1 , p2 ), τ ∗ ( p1 , p2 ))
⎪ ⎨ p1
⎪
⎪
⎪
⎪
⎪⎪
⎪ ⎩ max πr 2 ( p2 , w1∗ ( p1 , p2 ), w2∗ ( p1 , p2 ), τ ∗ ( p1 , p2 ))
⎪
⎪ p2
⎨
⎪ w1∗ ( p1 , p2 ), w2∗ ( p1 , p2 ), τ ∗ ( p1 , p2 ) are derived from solving the following problem
⎪
⎪ ⎧
⎪
⎪ ⎨ max πm1 (w1 )
⎪
⎪
⎪
⎪ w1
⎪
⎩ ⎩ max πm2 (w2 , τ )
w2 ,τ

So, we first need to derive the two manufacturers’ best response functions given earlier decisions p1 and p2 made by the
two retailers, respectively. The two manufacturers’ best response functions can be derived as in Equations (18)–(20).
γ a1 + βcm1
w1∗ ( p1 , p2 ) = − p1 + p2 + , (18)
β β
 
γ γδ βδ 2 − B δa2 a1 + βcm2
w2∗ ( p1 , p2 ) = − p1 + p2 − + , (19)
β B B B β
γδ βδ δa2
τ ∗ ( p1 , p2 ) = p1 − p2 + . (20)
B B B
It follows from Equations (18)–(20) that ∂wi∗ ( p1 , p2 )/∂ pi < 0, ∂wi∗ ( p1 , p2 )/∂ p j > 0, ∂τ ∗ ( p1 , p2 )/∂ p1 > 0,
∂τ ( p1 , p2 )/∂ p2 < 0, i = 1, 2, j = 3 − i. These mean that, in the RORT decision case, (i) the manufacturer i  s optimal
∗

wholesale price will decrease when the retailer i  s retail price increases, and it will increase when the retailer j  s retail price
increases, (ii) the manufacturer 2’s optimal remanufacturing effort will increase when the retailer 1’s retail price increases,
and it will decrease when the retailer 2’s retail price increases. So, we have the following Insight 2.
Insight 2 In the RORT case, the manufacturer i  s optimal wholesale price decreases with the retailer i  s retail price
and increases with the retailer j  s retail price, moreover, the manufacturer 2’s optimal remanufacturing effort increases with
the retailer 1’s retail price and decreases with the retailer 2’s retail price.
Having the information about the two manufacturers’ decisions, the two retailers would then use them to maximise
their own profits simultaneously. Substituting Equations (18)–(20) into the two retailers’ profit functions, i.e.
 International Journal of Production Research 7

Equations (2) and (3), and applying the first-order conditions to the resulting profit functions in terms of the retail prices p1
and p2 , retailer 1’s retail price pr∗or t1 and retailer 2’s retail price pr∗or t2 can be derived as follows
β(3a1 + βcm1 )(2βδ 2 − 4B) + 3γ (2a2 βδ 2 − 3a2 B − β Bcm2 )
pr∗or t1 = , (21)
4β 2 (2βδ 2 − 4B) + 3γ 2 (3B − 2βδ 2 )
4β(2a2 βδ 2 − 3a2 B − β Bcm2 ) − γ (3a1 + βcm1 )(3B − 2βδ 2 )
pr∗or t2 = . (22)
4β 2 (2βδ 2 − 4B) + 3γ 2 (3B − 2βδ 2 )
With Equations (18)–(22), one can easily have the manufacturer 1’s optimal wholesale price wr∗or t1 and the manufacturer
2’s optimal wholesale price wr∗or t2 and optimal remanufacturing effort τr∗or t in the RORT model as follows
γ a1 + βcm1
wr∗or t1 = − pr∗or t1 + pr∗or t2 + , (23)
β β
 
γ γδ βδ 2 − B ∗ δa2 a1 + βcm2
wr∗or t2 = − pr∗or t1 + pr or t2 − + , (24)
β B B B β
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γδ ∗ βδ ∗ δa2
τr∗or t = p − p + , (25)
B r or t1 B r or t2 B
where pr∗or t1 and pr∗or t2 are defined as in Equations (21) and (22), respectively.
Proposition 3 In the RORT model, manufacturer 1’s equilibrium wholesale price wr∗or t1 is given in Equation (23),
manufacturer 2’s equilibrium wholesale price wr∗or t2 and equilibrium remanufacturing effort τr∗or t are given in Equations
(24) and (25), respectively, and the two retailers’ equilibrium retail prices pr∗or t1 , pr∗or t2 are given in Equations (21) and
(22), respectively.

3.4 The MORT model

The MORT model arises in the markets where two retailers retail two substitutable products (e.g. copiers), and one retailer’s
power is smaller compared to her manufacturer’s and the other retailer’s power is larger compared to her manufacturer’s.
For example, manufacturer 1 (e.g. Lenovo who has not incorporated a remanufacturing process) plays a more dominant
role than his small- and medium-sized agents, however, retailer 2 (e.g. WalMart) plays a more dominant role than her
supplier/manufacturer (e.g. Xerox who has incorporated a remanufacturing process). In these real-world supply chains, the
manufacturer 1 is a leader and the retailer 1 is a follower in chain 1, and the retailer 2 is a leader and the manufacturer 2 is a
follower in chain 2. So, manufacturer 1 and retailer 2 first announce the wholesale price w1 and retail price p2 simultaneously,
then retailer 1 and manufacturer 2 decide retail price p1 , wholesale price w2 and remanufacturing effort τ to maximise their
profits simultaneously. The MORT model is given as follows
⎧⎧
⎪ ⎨ max
⎪ πm1 (w1 , p1∗ (w1 , p2 ), w2∗ (w1 , p2 ), τ ∗ (w1 , p2 ))
⎪
⎪ w1
⎪
⎪ ⎩ max πr 2 ( p2 , p∗ (w1 , p2 ), w ∗ (w1 , p2 ), τ ∗ (w1 , p2 ))
⎪
⎪
⎨ p2 1 2
∗ ∗ ∗
p1 (w1 , p2 ), w2 (w1 , p2 ), τ (w1 , p2 ) are derived from solving the following problem
⎪ ⎧
⎪
⎪ ⎨ max πr 1 ( p1 )
⎪
⎪
⎪
⎪
p1
⎪ ⎩ max πm2 (w2 , τ )
⎩
w2 ,τ

Given earlier decisions p2 and w1 made by retailer 2 and manufacturer 1, respectively, the best response functions of
manufacturer 2 and retailer 1 can be derived by setting ∂πr 1 ( p1 )/∂ p1 , ∂πm2 (w2 , τ )/∂w2 and ∂πm2 (w2 , τ )/∂τ to zero and
solving for p1 , w2 and τ simultaneously, as follows
a1 γ 1
p1∗ (w1 , p2 ) = + p2 + w 1 , (26)
2β 2β 2
a γ δ a δ δ(γ 2 − 2β 2 ) γδ
τ ∗ (w1 , p2 ) =
1 2
+ + p2 + w1 , (27)
2β B B 2β B 2B
   
∗ a2 a1 γ a1 γ δ 2 a2 δ 2 βδ 2 − B γ2 γ 2δ2 γ γ δ2
w2 (w1 , p2 ) = + cm2 + 2 − − + + 2− p2 + − w1 . (28)
β 2β 2β B B B 2β 2β B 2β 2B
It follows from Equations (26) and (27) that ∂ p1∗ (w1 , p2 )/∂ p2 > 0, ∂ p1∗ (w1 , p2 )/∂w1 > 0, ∂τ ∗ (w1 , p2 )/∂ p2 < 0,
∂τ ∗ (w 1 , p2 )/∂w1 > 0. These mean that, in the MORT decision case, (i) the retailer 1’s optimal retail price will increase when
 8 J. Wei and J. Zhao

the retailer 2’s retail price and the manufacturer 1’s wholesale price increase, (ii) the manufacturer 2’s optimal remanufacturing
effort will decrease when the retailer 2’s retail price increases, and it will increase when the manufacturer 1’s wholesale price
increases. So, we have the following Insight 3.
Insight 3 In the MORT case, the retailer i  s optimal retail price increase with retailer 2’s retail price and manufacturer
1’s wholesale price, and manufacturer 2’s optimal remanufacturing effort decreases with the retailer 2’s retail price and
increases with manufacturer 1’s wholesale price.
Having the information about the decisions of manufacturer 2 and retailer 1, retailer 2 and manufacturer 1 would then
use them to maximise their profits simultaneously. Substituting Equations (26)–(28) into Equations (3) and (4), and applying
the first-order conditions to the resulting profit functions in terms of the p2 and w1 , we can derive retailer 2’s retail price
∗ ∗
pmor t2 and manufacturer 1’s wholesale price wmor t1 as follows

∗ −E 2 (a1 + βcm1 ) − 2β E 3
pmor t2 = , (29)
γ E 2 + 2β E 1
∗ E 1 (a1 + βcm1 ) − γ E 3
wmor t1 = , (30)
γ E 2 + 2β E 1
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γ 2 − 2β 2 γ2 γ 2 δ2 βδ 2 γ γ2 γ 2 δ2 βδ 2 γ 2 −2β 2 γ γ δ2 2βa2 + γ a1
where E 1 = β (2 − 2β 2 + 2β B − B ), E 2 = 2 (2 − 2β 2 + 2β B − B ) − 2β ( 2β − 2B ), E3 = 2β (2 −
γ2 γ 2 δ2 βδ 2 γ 2 −2β 2 a2 γ a1 γ δ 2 a1 δ 2 a2
2β 2
+ 2β B − B ) − 2β ( β + cm2 + 2β 2 − 2β B − B ).
From Equations (26)–(30), one can easily have manufacturer 2’s optimal wholesale price wmor ∗
t2 and optimal remanu-
∗ ∗
facturing effort τmor t and retailer 1’s optimal retail price pmor t1 in the MORT model as follows

∗ a1 γ ∗ 1
pmor t1 = + p + w∗ , (31)
2β 2β mor t2 2 mor t1
∗ a1 γ δ a2 δ δ(γ 2 − 2β 2 ) ∗ γδ ∗
τmor t = + + pmor t2 + w , (32)
2β B B 2β B 2B mor t1
 2   
∗ a2 a1 γ a1 γ δ 2 a2 δ 2 βδ − B γ2 γ 2δ2 ∗ γ γ δ2 ∗
wmor t2 = + cm2 + 2 − − + + 2− pmor t2 + − wmor t1 , (33)
β 2β 2β B B B 2β 2β B 2β 2B
∗ ∗
where pmor t2 and wmor t1 are defined as in Equations (29) and (30), respectively.
Proposition 4 In the MORT model, manufacturer 1’s equilibrium wholesale price wmor ∗
t1 is given in Equation (30),
∗
manufacturer 2’s equilibrium wholesale price wmor t2 and equilibrium remanufacturing effort τmor ∗
t are given in Equations
∗
(32) and (33), respectively, retailer 1’s equilibrium retail price pmor t1 is given in Equation (31), and retailer 2’s equilibrium
∗
retail price pmor t2 is given in Equation (29).

3.5 The ROMT model

The ROMT model arises in the markets where two retailers retail two substitutable products (e.g. copiers), and one retailer’s
(retailer 1) power is larger compared to her manufacturer’s (manufacturer 1 who has not incorporated a remanufacturing
process) and the other retailer’s (retailer 2) power is smaller compared to her manufacturer’s (manufacturer 2 who has
incorporated a remanufacturing process). For example, retailer 1 (e.g. WalMart) plays a more dominant role than her
supplier/manufacturer (e.g. Lenovo), however, manufacturer 2 (e.g. Xerox) plays a more dominant role than his small-
and medium-sized agents. In these real-world supply chains, the manufacturer 2 is a leader and the retailer 2 is a follower
in chain 2, and the retailer 1 is a leader and the manufacturer 1 is a follower in chain 1. So, manufacturer 2 and retailer
1 first announce the wholesale price w2 , remanufacturing effort τ and retail price p1 simultaneously, then retailer 2 and
manufacturer 1 decide the retail price p2 and the wholesale price w1 to maximise their profits simultaneously. The ROMT
model is given as follows
⎧⎧
⎪
⎪ ⎨ max πm2 (w2 , τ, w1∗ (w2 , τ, p1 ), p2∗ (w2 , τ, p1 ))
⎪
⎪ w2 ,τ
⎪
⎪
⎪
⎪ ⎩ max πr 1 ( p1 , w1∗ (w2 , τ, p1 ), p2∗ (w2 , τ, p1 ))
⎨ p1
w1∗ (w2 , τ, p1 ), p2∗ (w2 , τ, p1 ) are derived from solving the following problem
⎧
⎪
⎪
⎪
⎪ ⎨ max πm1 (w1 )
⎪
⎪ w1
⎪
⎪
⎩ ⎩ max πr 2 ( p2 )
p2
 International Journal of Production Research 9

We first need to derive the best response functions of retailer 2 and manufacturer 1 given earlier decisions w2 , τ and p1
made by manufacturer 2 and retailer 1, respectively. By setting ∂πm1 (w1 )/∂w1 and ∂πr 2 ( p2 )/∂ p2 to zero and solving for
w1 and p2 simultaneously, the best response functions of manufacturer 1 and retailer 2 can be derived as follows

γ a2 a1 γ 2 − 2β 2 γ
w1∗ (w2 , τ, p1 ) = + + c m1 + p1 + w2 , (34)
2β 2 β 2β 2 2β
a2 γ 1
p2∗ (w2 , τ, p1 ) = + p1 + w 2 . (35)
2β 2β 2
It follows from Equations (34) and (35) that ∂w1∗ (w2 , τ, p1 )/∂ p1 < 0, ∂w1∗ (w2 , τ, p1 )/∂w2 > 0, ∂ p2∗ (w2 , τ, p1 )/∂ p1 >
0, ∂ p2∗ (w2 , τ, p1 )/∂w2 > 0. These mean that, in the ROMT decision case, (i) the manufacturer 1’s optimal wholesale price
will increase when the manufacturer 2’s wholesale price increases and will decrease when the retailer 1’s retail price increases,
(ii) the retailer 2’s optimal retail price will increase when the retailer 2’s retail price and the manufacturer 2’s wholesale price
increase. So, we have the following Insight 4.
Insight 4 In the ROMT case, the manufacturer 1’s optimal wholesale price increases with the manufacturer 2’s
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wholesale price and decreases with the retailer 1’s retail price, and the retailer 2’s optimal retail price increase with the
retailer 2’s retail price and the manufacturer 2’s wholesale price.
Having the information about the decisions of manufacturer 1 and retailer 2, retailer 1 and manufacturer 2 would then
use them to maximise their own profits simultaneously. Substituting w1 and p2 in Equations (34) and (35) into the profit
functions of retailer 1 and manufacturer 2 in Equations (2) and (5), and applying the first-order conditions to the resulting
profit functions in terms of the p1 , w2 and τ gives the retailer 1’s retail price pr∗omt1 , the manufacturer 2’s wholesale price
wr∗omt2 and equilibrium remanufacturing effort τr∗omt , at equilibrium as follows

E 4 β(4B − βδ 2 ) − E 5 (2Bβcm2 + a2 (2B − βδ 2 ))

pr∗omt1 = , (36)
E 6 β(4B − βδ 2 ) − E 5 γ (βδ 2 − 2B)
E 6 (2Bβcm2 + a2 (2B − βδ 2 )) − E 4 γ (βδ 2 − 2B)
wr∗omt2 = , (37)
E 6 β(4B − βδ 2 ) − E 5 γ (βδ 2 − 2B)
δa2 βδ ∗ γδ ∗
τr∗omt = − wmtr o2 + p , (38)
2B 2B 2B mtr o1

where E 4 = γ 2β − 4β
(a1 + γ2βa2 ) + γ − 2β γ a2
( 2β 2 + aβ1 + cm1 ), E 5 = γ (3β2β−2 γ ) , E 6 = (γ − 2β 2β)(4β −γ )
2 2 2 2 2 2 2 2 2 2
2 2β 3 .
∗
From Equations (34)–(38), one can easily have manufacturer 1’s optimal wholesale price wr omt1 and retailer 2’s optimal
retail price pr∗omt2 in the ROMT model as follows

γ a2 a1 γ 2 − 2β 2 ∗ γ ∗
wr∗omt1 = + + c m1 + pr omt1 + w , (39)
2β 2 β 2β 2 2β r omt2
a2 γ ∗ 1
pr∗omt2 = + pr omt1 + wr∗omt2 , (40)
2β 2β 2
where pr∗omt1 and wr∗omt2 are given as in Equations (36) and (37), respectively.
Proposition 5 In the ROMT model, manufacturer 1’s equilibrium wholesale price wr∗omt1 is given in Equation (39),
manufacturer 2’s equilibrium wholesale price wr∗omt2 and equilibrium remanufacturing effort τr∗omt are given in Equations
(37) and (38), respectively, retailer 1’s equilibrium retail price pr∗omt1 is given in Equation (36), and retailer 2’s equilibrium
retail price pr∗omt2 is given in Equation (40).

4. Comparisons and managerial implications

In this section, we consider the special case that the parameters in five decision models established above are all symmetric,
that is, a1 = a2 = a, and cm1 = cm2 = cm . The reason for restricting the two substitutable products to have identical
parameter values is to enable a comparison of the five models and to gain more insights into the managerial implication. The
asymmetry between the products creates problems during comparison of decision models (Mishra and Raghunathan 2004;
Tsay and Agrawal 2000). Thus, using simplified parameter structures can separate the effects of different power structures
from different parameters in the models on the optimal strategies and the maximal profits.
 10 J. Wei and J. Zhao

4.1 Sensitivity analysis of the equilibrium solutions

Because the equilibrium solutions derived in the aforementioned models are very complicated, it is very difficult to derive
analytical results thoroughly regarding the behaviour of the decisions and chain members’ maximum profits. In order to test
the robustness of the computational results, we conduct an in-depth sensitivity analysis to illustrate the trajectories of the
decisions and chain members’ maximum profits and to quantify such behaviours and properties.
For both the manufacturers and the retailers to be profitable in each decision model, the parameters a, δ, β, γ , and B
should satisfy some constraint conditions. For example, the parameters should make the contribution margins for the two
manufacturers positive, namely, wi − cm > 0, and they should make the remanufacturing effort satisfy 0 ≤ τ ≤ 1, and
so on. However, due to the complicated form of the analytic results, it is very difficult to obtain the analytic conditions for
parameters a, δ, β, γ , and B. In the following numerical studies, we have to apply the simulation method to choose the
appropriate parameter values which make sure the two manufacturers and the two retailers are all profitable. We estimate
the parameter values after studying the cost structure and the relationship among the parameters of the examples which are
presented in Shi, Zhang, and Sha (2011), Savaskan and Van Wassenhove (2006), Wu (2012) and Ovchinnikov (2011). Thus,
we think that the proposed numerical example can present the practical hybrid manufacturing and remanufacturing system
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as closely as possible.
Although we only report a particular case (i.e. the RORT model) in the following, similar observations have been obtained
from the other four models, which are not presented in this article for brevity.
Discussion 1 Sensitivity analysis of the parameters β and γ .
First, we explore how the optimal retail prices, wholesale prices, remanufacturing effort and the chain members’
maximum profits are affected by changes in the self-price sensitivity β. Figures 1–3 show the changes of the optimal
prices, remanufacturing effort and the chain members’ maximum profits with the parameter β in the RORT model, where
default values of parameters are a = 20, cm = 8, cr = 6, γ = 0.3, B = 30, and β ∈ {0.45, 0.5, 0.55, 0.6, 0.65, 0.7}. It
follows from Figures 1–3 that the optimal wholesale prices (i.e. w1∗ , w2∗ ), the optimal retail prices (i.e. p1∗ , p2∗ ), the optimal
remanufacturing effort τ ∗ and the corresponding chain members’ maximum profits (i.e. πm1 ∗ , π ∗ , and π ∗ ) all decrease in
m2 r
the self-price sensitivity β in the RORT model.
Next, the mechanism by which the optimal retail prices, wholesale prices, remanufacturing effort and the maximum
profits are affected by the changes in the cross-price sensitivity γ is investigated. Figures 4–6 present the changes of the
optimal prices, remanufacturing effort and the chain members’ maximum profits with the parameter γ in the RORT model,
where the parameter values are a = 20, cm = 8, cr = 6, β = 0.8, B = 30, and γ ∈ {0.34, 0.38, 0.42, 0.46, 0.5, 0.54}. It
follows from Figures 4–6 that the optimal wholesale prices (i.e. w1∗ , w2∗ ), the optimal retail prices (i.e. p1∗ , p2∗ ), the optimal
remanufacturing effort τ ∗ and the corresponding chain members’ maximum profits (i.e. πm1 ∗ , π ∗ , and π ∗ ) all increase in
m2 r
the cross-price sensitivity γ in the RORT model.
Similarly, we can obtain the same results in the other four decision models, and the details are not presented in this article.
It follows that regardless of the industry organisation structures and chain members’ competing forms, the optimal prices,
the optimal remanufacturing effort and the maximum profits decrease with increasing values of self-price sensitivity β, and
increase with increasing values of cross-price sensitivity γ . This is because the demands for the two products are negatively
correlated to β and are positively correlated to γ .
0.65
isτ*
rort

0.6
remanufacturing effort

0.55

0.5

0.45

0.4
0.45 0.5 0.55 0.6 0.65 0.7 0.75
β

Figure 1. Changes of optimal remanufacturing effort with parameter β in RORT model.

 International Journal of Production Research 11
80
*
is w
rort1
70 is w*
rort2
*
is p
rort1
60 *
is p
rort2

50

price
40

30

20

10
0.45 0.5 0.55 0.6 0.65 0.7 0.75
β
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Figure 2. Changes of optimal prices with parameter β in RORT model.

450
*
isπ
r1
400 isπ*
r2
isπ*m1
350
*
isπm2

300
profit

250

200

150

100

50
0.45 0.5 0.55 0.6 0.65 0.7 0.75
β

Figure 3. Changes of maximum profits with parameter β in RORT model.

0.65

*
isτ
rort
0.6
remanufacturing effort

0.55

0.5

0.45

0.4
0.35 0.4 0.45 0.5 0.55
γ

Figure 4. Changes of optimal remanufacturing effort with parameter γ in RORT model.

 12 J. Wei and J. Zhao
45

40

35 *
is w
rort1
is w*

price
rort2
30 *
is p
rort1
*
is p
rort2
25

20

15
0.35 0.4 0.45 0.5 0.55
γ
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Figure 5. Changes of optimal prices with parameter γ in RORT model.

220

200
isπ*
r1
isπ*
r2
180
*
isπ
m1
160 *
isπ
m2

140
profit

120

100

80

60

40
0.35 0.4 0.45 0.5 0.55
γ

Figure 6. Changes of maximum profits with parameter γ in RORT model.

Discussion 2 Sensitivity analysis of the parameters a, B and δ.

Firstly, we explore how the optimal retail prices, wholesale prices, remanufacturing effort and the chain members’
maximum profits are affected by changes in the market base a. Figures 7–9 present the changes of the optimal prices,
remanufacturing effort and the chain members’ maximum profits with parameter a in the RORT model, where the parameters
values are cm = 8, cr = 6, β = 0.5, γ = 0.3, B = 30, and a ∈ {16, 17, 18, 19, 20, 21}.
Secondly, the effects of changes in the cost-savings from the remanufacturing, i.e. cm − cr , or δ, on the optimal retail
prices, wholesale prices, remanufacturing effort and the chain members’ maximum profits in the RORT model are presented
as shown in Figures 10–12, where a = 20, cr = 6, β = 0.5, γ = 0.3, B = 30, and cm ∈ {7.02, 7.04, 7.06, 7.08, 7.1, 7.12}.
Thirdly, the mechanism is investigated by which the optimal retail prices, wholesale prices, remanufacturing effort and
the chain members’ maximum profits are affected by the changes in the scaling parameter B for the collecting process. Figures
13–15 present the changes of the optimal prices, remanufacturing effort and the chain members’ maximum profits with the
parameter B in the RORT model, where default values of parameters are a = 20, cm = 8, cr = 6, β = 0.5, γ = 0.3, and
B ∈ {31, 32, 33, 34, 35, 36}.
From Figures 7–15, we can draw the following conclusions for the RORT model:
 International Journal of Production Research 13

(2.1) The optimal retail prices, wholesale prices, remanufacturing effort and the chain members’ maximum profits increase
as parameter a increases. This is because of the increase in demands of two products resulting from the increase of
parameter a.
(2.2) As parameter δ increases, the optimal retail prices and the optimal wholesale prices will slightly increase, whereas the
remanufacturer’s remanufacturing effort will sharply increase. Meanwhile, the maximum profits of the manufacturer
1 and both retailers will slowly decrease, this is because of the increase in retail prices of two products which
directly induces the decrease in demands of two products, and the increased profits resulting from higher retail
prices can not offset the loss of revenue due to the decreased total demand. On the contrary, the remanufacturer’s
maximum profit will slowly increase as parameter δ increases which is because the increased profit resulting from
lower remanufacturing cost is more than the loss of revenue due to the decreased total demand.
(2.3) As parameter B increases, the optimal retail prices of two products and the optimal wholesale price of product 1
will slowly increase, the optimal wholesale price of product 2 will slowly decrease, whereas the remanufacturing
effort will sharply decrease. Moreover, as parameter B increases, the maximum profits of the manufacturer 1 and
both retailers will slowly increase. On the contrary, the remanufacturer’s maximum profit will slowly decrease as
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parameter B increases.

0.62

0.6 *
isτ
rort
0.58
remanufacturing effort

0.56

0.54

0.52

0.5

0.48

0.46

0.44
16 17 18 19 20 21
a

Figure 7. Changes of optimal remanufacturing effort with parameter a in RORT model.

65

60

55
*
is wrort1
50
*
is wrort2
45 *
is p
price

rort1
*
40 is prort2

35

30

25

20
16 17 18 19 20 21
a

Figure 8. Changes of optimal prices with parameter a in RORT model.

 14 J. Wei and J. Zhao
350
*
isπr1
300 isπ*
r2
*
isπm1
250 isπ*
m2

profit
200

150

100

50
16 17 18 19 20 21
a
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Figure 9. Changes of maximum profits with parameter a in RORT model.

0.325
isτ*rort
0.32

0.315
remanufacturing effort

0.31

0.305

0.3

0.295

0.29

7 7.02 7.04 7.06 7.08 7.1 7.12 7.14

δ

Figure 10. Changes of optimal remanufacturing effort with parameter δ in RORT model.

60

55
is w*
rort1

50
is w*
rort2

is p*
rort1
45 *
is prort2
price

40

35

30

25

20
7 7.02 7.04 7.06 7.08 7.1 7.12 7.14
δ

Figure 11. Changes of optimal prices with parameter δ in RORT model.

 International Journal of Production Research 15
300

280
isπ*
r1
*
260 isπ
r2
*
isπ
240 m1

isπ*
m2
220

profit
200

180

160

140

120
7 7.02 7.04 7.06 7.08 7.1 7.12 7.14
δ
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Figure 12. Changes of maximum profits with parameter δ in RORT model.

0.57
isτ*
rort
0.56

0.55
remanufacturing effort

0.54

0.53

0.52

0.51

0.5

0.49

0.48

0.47
31 32 33 34 35 36
B

Figure 13. Changes of optimal remanufacturing effort with parameter B in RORT model.

60

55
*
is wrort1
50 *
is wrort2

is p*
45 rort1
*
is prort2
price

40

35

30

25

20
31 32 33 34 35 36
B

Figure 14. Changes of optimal prices with parameter B in RORT model.

 16 J. Wei and J. Zhao
300

280
*
isπ
r1
260 *
isπ
r2
240 *
isπm1
*
isπ
220 m2

profit
200

180

160

140

120
31 32 33 34 35 36
B
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Figure 15. Changes of maximum profits with parameter B in RORT model.

Similarly, we can obtain the same results in the other four decision models, and the details are not presented in this article. It
follows that regardless of the industry organisation structures and chain members’ competing forms, (1) the remanufacturer’s
remanufacturing effort will sharply increase as parameters a and δ increase, and it will sharply decrease as parameter B
increases; (2) the optimal prices, and the chain members’ maximum profits increase as parameter a increases; (3) the optimal
prices and the chain members’ maximum profits slightly change as parameters B and δ increase.

4.2 Numerical example

Due to the complicated form of the analytic results, in this subsection, we conduct an in-depth numerical study as a complement
to exploit their property. We report on the numerical results to quantify such behaviours and properties, and more importantly,
to attend managerial insights into the profit tendencies and economic implications associated with the aforementioned models.
Consider the case where the model parameters are as follows: cm1 = cm2 = 8, cr = 6, a1 = a2 = 20, β = 0.5, γ = 0.3,
and B = 30. The corresponding results are shown as in Tables 1 and 2.
Discussion 3 Comparison of the maximum profits in five decision models.
From Table 1, we can have the following results.
(3.1) The total profit of chain 1 without remanufacturing achieves the highest profit in the MORT model, followed by
the RORT model, and then the MOMT model, the ROMT model and finally the CD model. On the other hand, the
total profit of chain 2 with remanufacturing achieves the highest profit in the ROMT model, followed by the RORT
model, the MOMT model, the MORT model and then the CD model. This means that the total profit of each chain
in decentralised case is larger than that in centralised case. Moreover, the total profit of chain 2 under the case where
the retailer 1 is a leader in chain 1 is larger than that under the case where the retailer 1 is a follower in chain 1.
Similarly, the total profit of chain 1 under the case where the retailer 2 is a leader in chain 2 is larger than that under
the case where the retailer 2 is a follower in chain 2. This indicates that a chain holds advantage in getting the higher
profit when its competing chain’s leader is the retailer.
(3.2) The industry profit in decentralised case is larger than that in centralised case. The industry profit in the MORT model
is larger than that in the MOMT model, the industry profit in the RORT model is larger than that in the ROMT model
and the industry profit in the RORT model is larger than that in the MORT model. This indicates that the industry
holds advantage in getting the higher profit when the two retailers are the leaders in the two competing supply chains.
(3.3) By comparing among the four decentralised decision cases, manufacturer 1 without remanufacturing achieves his
highest profit in the MOMT model, followed by the MORT model, then the RORT model, and achieves the least
profit in the ROMT model, whereas manufacturer 2 with remanufacturing achieves his highest profit in the MOMT
model, followed by the ROMT model, then the RORT model, and achieves the least profit in the MORT model. This
means that the manufacturer i holds advantage in getting the higher profit when he is a leader in the supply chain
i, i = 1, 2, and the manufacturer i who is a leader in the supply chain i can get more profit when the competing
chain’s leader is the manufacturer j than that when the competing chain’s leader is the retailer j, i = 1, 2, j = 3 − i.
 International Journal of Production Research 17

Table 1. Chain members’ maximum profits in five decision models.

Scenario ∗ + π∗ + π∗ + π∗
πm1 ∗ + π∗
πm1 ∗ + π∗
πm2 ∗
πm1 ∗
πm2 πr∗1 πr∗2
r1 m2 r2 r1 r2

CD 692.65 337.69 354.96 − − − −

MOMT 838.50 414.10 424.40 285.48 291.20 128.62 133.20
RORT 845.94 414.29 431.65 138.10 165.37 276.19 266.28
MORT 842.75 423.04 419.71 282.03 130.06 141.01 289.65
ROMT 842.16 405.73 436.43 126.02 289.32 279.71 147.11

Table 2. Optimal prices and remanufacturing effort in five decision models.

Scenario p1∗ w1∗ p1∗ − w1∗ p2∗ w2∗ p2∗ − w2∗ τ∗

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CD 33.988 – – 33.293 – – 0.9033

MOMT 59.637 43.599 16.038 59.461 43.139 16.322 0.5440
RORT 57.857 24.619 33.238 57.461 26.594 30.867 0.5751
MORT 58.381 41.587 16.794 58.625 23.310 35.315 0.5468
ROMT 59.113 23.876 35.237 58.315 41.162 17.153 0.5718

(3.4) By comparing among the four decentralised decision cases, retailer 1 achieves her highest profit in the ROMT model,
followed by the RORT model, then the MORT model, and achieves the least profit in the MOMT model, whereas
retailer 2 achieves her highest profit in the MORT model, followed by the RORT model, then the ROMT model, and
achieves the least profit in the MOMT model. This means that the retailer i holds advantage in getting the higher
profit when she is a leader in the supply chain i, i = 1, 2, and the retailer i who is a leader in the supply chain i can
get more profit when the competing chain’s leader is the manufacturer j than that when the competing chain’s leader
is the retailer j, i = 1, 2, j = 3 − i.
Discussion 4 Comparison of the optimal prices and remanufacturing effort in five decision models.
From Table 2, the following results can be derived.
(4.1) Product 1 achieves the lowest retail price in the CD model, this is followed by the RORT model, the MORT model
and the ROMT model, and the highest retail price is obtained in the MOMT model, whereas product 2 achieves the
lowest retail price in the CD model, followed by the RORT model, the ROMT model, the MORT model and the
highest retail price in the MOMT model. This indicates that consumers are better off when the two supply chains
are centralised. Moreover, comparing among the four decentralised decision cases, the best decision case for end
consumers is the RORT model and the worst decision case for end consumers is the MOMT model.
(4.2) Product 1 achieves the lowest wholesale price in the ROMT model, this is followed by the RORT model and the
MORT model, and the highest wholesale price is obtained in the MOMT model, whereas product 2 achieves the lowest
wholesale price in the MORT model, followed by the RORT model, the ROMT model and the highest wholesale
price in the MOMT model. This indicates that the two manufacturers will charge higher wholesale prices when they
have leaderships in their own supply chain.
(4.3) Comparing among the four decentralised decision cases, retailer i will obtain the biggest profit margin from product
i when she has the leadership of chain i and the manufacturer j has the leadership of chain j, i = 1, 2, j = 3 − i,
and the both retailers will obtain the smallest profit margins when they are the followers of two competing supply
chains simultaneously.
(4.4) Compared with the five decision models, the remanufacturer’s remanufacturing effort obtains the highest value in the
CD model, followed by the RORT model then the ROMT model, the MORT model and the lowest value in the MOMT
model. This means that the remanufacturer will spend the highest remanufacturing effort when the two supply chains
are centralised. Moreover, the leader–follower relationships of competing supply chains affect the remanufacturer’s
remanufacturing effort, and the remanufacturer will spend more higher remanufacturing effort when the leadership
of competing supply chain is possessed by the retailer than that when the leadership of competing supply chain is
possessed by the manufacturer.
 18 J. Wei and J. Zhao

5. Some concluding comments

This article studies the pricing and remanufacturing decisions in two supply chains which compete in the market with two
substitutable products. Five decision models are established by considering different industry organisation structures and
chain members’ different competing forms, and the optimal decisions and maximal profits of the chain members are derived
in five models. We provide comparison and analysis of the equilibrium solutions and perform the sensitivity analysis on the
key parameters through numerical studies. Some interesting managerial insights are derived.
However, our results are based upon some assumptions about the models of competing supply chains. Thus, several
extensions to the analysis in this paper are possible. First, as opposed to the risk-neutral chain members considered in this
paper, one could study the case where the chain members with different attitudes towards risk and could also examine
the influence of their attitudes towards risk on individual decisions and profits. Second, this paper considers a case with
deterministic-linear-demand function in a single period, one can study the case with other forms of demand function in
stochastic/fuzzy multiple periods environment. Third, this article considers the case where only two supply chains compete
in the market with two substitutable products and the two supply chains have the same chain structure, one can consider the
case where n (n ≥ 3) supply chains competing in the market and these supply chains may have different chain structures. At
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last, this article assumes two supply chains’members always having different market powers and they always play Stackelberg
game, one can consider the case where one or n (n ≥ 2) supply chains’ members have equal market powers and they either
play Nash game or adopt cooperation action.

Acknowledgements
The authors sincerely thank the editor and the anonymous reviewers for their many helpful suggestions and insightful comments, which
have significantly improved the content and presentation of this paper. We gratefully acknowledge the support of (i) National Natural
Science Foundation of China (NSFC), Research Fund Nos. 71371186 and 71001106, for J. Wei; (ii) The Major Program of the National
Social Science Fund of China (Grant no.13&ZD147), and National Natural Science Foundation of China, No. 71301116, for J. Zhao.

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Appendix 1. Notations for problem description

Symbol Description

pi Unit retail price of product i which is the retailer i’s decision variable, i = 1, 2
wi Unit wholesale price of product i, which is the manufacturer i’s decision variable, i = 1, 2
cmi Unit manufacturing cost of product i, i = 1, 2
cr Unit remanufacturing cost of product 2
β Self-price sensitivity of a product’s demand to its own price
γ Cross-price sensitivity of a product’s demand to the price of its substitutable product
Di The demand for product i, i = 1, 2
τ Manufacturer 2’s remanufacturing effort, which is the manufacture 2’s decision variable
B Scaling parameter of the manufacturer 2’s recycling process

Appendix 2. Conditions for model parameters

To ensure that the various profit expressions will be well behaved and possess a unique optimum, similar to Tsay and Agrawal (2000), we
impose the following condition on the parameters:

βδ 2 βδ 2 (2β 2 − γ 2 )
B > max , . (B1)
2 4β 2 − γ 2

Appendix 3.
Proof of Proposition 1 It follows from Equations (6) and (7) that the first-order derivative of πc1 to p1 and the first-order partial
derivatives of πc2 to p2 and τ can be shown as
∂πc1
= a1 + βcm1 − 2βp1 + γ p2 , (C1)
∂ p1
∂πc2
= a2 − 2βp2 + γ p1 + βcm2 − βδτ, (C2)
∂ p2
∂πc2
= a2 δ − βδp2 + γ δp1 − Bτ. (C3)
∂τ
Then we get
∂ 2 πc1 ∂ 2 πc2 ∂ 2 πc2 ∂ 2 πc2 ∂ 2 πc2
= −2β < 0, = −2β, = −B, = = −βδ. (C4)
∂ p12 ∂ p22 ∂τ 2 ∂ p2 ∂τ ∂τ ∂ p2
 20 J. Wei and J. Zhao

It follows from Equation (C4) and the assumption (B1) that πc1 is concave in p1 and πc2 is jointly concave in p2 and τ . Therefore,
by setting Equations (C1)–(C3) to zero and solving them simultaneously, we obtain Equations (8)–(10). Thus, Proposition 1 is proved.
Proof of Proposition 2 It follows from Equations (2) and (3) that the first- and second-order derivatives of πr 1 to p1 and πr 2 to p2 can
be shown as

∂πr 1
= a1 − 2βp1 + γ p2 + βw1 , (C5)
∂ p1
∂πr 2
= a2 − 2βp2 + γ p1 + βw2 , (C6)
∂ p2
∂ 2 πr 1 ∂ 2 πr 2
2
= = −2β < 0. (C7)
∂ p1 ∂ p22

It follows from Equation (C7) that πri is concave in pi , i = 1, 2. Therefore, by setting Equations (C5) and (C6) to zero and solving them
simultaneously, we obtain Equations (11) and (12).
From Equations (4), (5), (11) and (12) that the first-order derivative of πm1 to w1 and the first-order partial derivatives of πm2 to w2
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and τ can be shown as

∂πm1 β(2βa1 + γ a2 ) + βcm1 (2β 2 − γ 2 ) 2β(2β 2 − γ 2 ) β2γ

= − w1 + w2 , (C8)
∂w1 4β 2 − γ 2 4β 2 − γ 2 4β 2 − γ 2
∂πm2 β(2βa2 + γ a1 ) + βcm2 (2β 2 − γ 2 ) β2γ 2β(2β 2 − γ 2 ) βδ(2β 2 − γ 2 )
= + 2 w1 − w2 − τ, (C9)
∂w2 4β − γ
2 2 4β − γ 2 4β − γ
2 2 4β 2 − γ 2
∂πm2 βδ(2βa2 + γ a1 ) β2γ δ βδ(2β 2 − γ 2 )
= + w1 − w2 − Bτ. (C10)
∂τ 4β 2 − γ 2 4β 2 − γ 2 4β 2 − γ 2

Then we get

∂ 2 πm1 2β(2β 2 − γ 2 ) ∂ 2 πm2 2β(2β 2 − γ 2 )

=− < 0, =− , (C11)
∂w12 4β 2 − γ 2 ∂w22 4β 2 − γ 2
∂ 2 πm2 ∂ 2 πm2 ∂ 2 πm2 βδ(2β 2 − γ 2 )
= −B, = =− . (C12)
∂τ 2 ∂w2 ∂τ ∂τ ∂w2 4β 2 − γ 2

From Equations (C11) and (C12) and the assumption (B1) that πm1 is concave in w1 and πm2 is jointly concave in w2 and τ . Therefore,
by setting Equations (C8)–(C10) to zero and solving them simultaneously, we obtain Equations (13)–(15). Using Equations (11)–(15),
Proposition 2 can be obtained.
Proof of Proposition 3 Without loss of generality, let m i be the margin of product i enjoyed by the retailer i, namely,

pi = wi + m i , (C13)

where m i > 0, i = 1, 2.
From Equations (4), (5) and (C13), the first-order derivative of πm1 to w1 and the first-order partial derivatives of πm2 to w2 and τ
can be shown as

∂πm1
= a1 − βp1 + γ p2 − βw1 + βcm1 , (C14)
∂w1
∂πm2
= a2 − βp2 + γ p1 − β(w2 − cm2 + δτ ), (C15)
∂w2
∂πm2
= δ(a2 − βp2 + γ p1 ) − Bτ. (C16)
∂τ

Then we get

∂ 2 πm1 ∂ 2 πm2 ∂ 2 πm2 ∂ 2 πm2 ∂ 2 πm2

= = −2β < 0, = −B, = = −βδ. (C17)
∂w12 ∂w22 ∂τ 2 ∂w2 ∂τ ∂τ ∂w2

Using Equation (C17) and the assumption (B1), we know that πm1 is concave in w1 and πm2 is jointly concave in w2 and τ . Therefore,
setting Equations (C14)–(C16) to zero and solving them simultaneously, we obtain Equations (18)–(20).
 International Journal of Production Research 21

It follows from Equations (2), (3), and Equations (18)–(20) that the first- and second-order derivatives of πr 1 to p1 and πr 2 to p2 can
be shown as
∂πr 1
= 3a1 + βcm1 − 4βp1 + 3γ p2 , (C18)
∂ p1
∂πr 2 a (3B − 2βδ 2 ) 2β(βδ 2 − 2B) γ (3B − 2βδ 2 )
= 2 βcm2 + p2 + p1 , (C19)
∂ p2 B B B
∂ 2 πr 1 ∂ 2 πr 2 2β(βδ 2 − 2B)
= −4β < 0, = . (C20)
∂ p2
1 ∂ p2
2
B

It follows from Equation (C20) and the assumption (B1) that πri is concave in pi , i = 1, 2. Therefore, by setting Equations (C18) and
(C19) to zero and solving them simultaneously, we obtain Equations (21) and (22). With Equations (18)–(22), one can easily see that
Proposition 3 holds.
Proof of Proposition 4 Given earlier decisions p2 and w1 made by the retailer 2 and manufacturer 1, respectively, we can have the
first-order derivative of πr 1 to p1 and the first-order partial derivatives of πm2 to w2 and τ as shown in Equations (C5), (C15) and (C16).
Therefore, setting Equations (C5), (C15) and (C16) to zero and solving them simultaneously, we obtain Equations (26)–(28).
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It follows from Equations (3), (4), (26), (27) and (28) that the first-order derivatives of πm1 to w1 and πr 2 to p2 can be shown as
∂πm1 a γ βc
= 1 − p2 − βw1 + m1 , (C21)
∂w1 2 2 2
∂πr 2
= E 1 p2 + E 2 w1 + E 3 . (C22)
∂ p2
Then we get

∂ 2 πm1 ∂ 2 πr 2
= −β < 0, = E 1 < 0. (C23)
∂w21 ∂ p22
With Equation (C23) and the condition (B1), we can know that πm1 is concave in w1 and πr 2 is concave in p2 . Setting Equations (C21)
and (C22) to zero and solving them, simultaneously, we obtain Equations (29) and (30).
From Equations (26)–(30), one can easily have Equations (29) and (30). Therefore, Proposition 4 holds.
Proof of Proposition 5 Given earlier decisions w2 , τ and p1 made by the manufacturer 2 and retailer 1, respectively, we can have the
first-order derivative of πm1 to w1 and the first-order derivative of πr 2 to p2 as shown in Equations (C14) and (C6). Therefore, setting
Equations (C6) and (C14) to zero and solving them simultaneously, we obtain Equations (34) and (35).
It follows from Equations (2), (5), (34) and (35) the first-order derivative of πr 1 to p1 and the first-order partial derivatives of πm2 to
w2 and τ can be shown as
∂πr 1 γ
= −E 4 + w2 + E 5 p1 , (C24)
∂ p1 2
∂πm2 βcm2 − a2 γ βδ
= − βw2 + p1 − τ, (C25)
∂w2 2 2 2
∂πm2 δa γδ βδ
= 2 − βw2 + p1 − w2 − Bτ. (C26)
∂τ2 2 2 2
Then we get

∂ 2 πr 1 ∂ 2 πm2 ∂ 2 πm2 ∂ 2 πm2 ∂ 2 πm2 βδ

= E 5 < 0, = −β, = −B, = =− . (C27)
∂ p12 ∂w22 ∂τ 2 ∂w2 ∂τ ∂τ ∂w2 2

Using Equation (C27) and the assumption (B1), we know that πr 1 is concave in p1 and πm2 is jointly concave in w2 and τ . Therefore, by
setting Equations (C24)–(C26) to zero and solving them simultaneously, Equations (36)–(38) can be obtained. From Equations (34)–(38),
we can obtain Proposition 5.