On the Robustness of the Consumer Homogeneity Assumption with Respect to the Discount Factor for Remanufactured Products

Kleber, Rainer, Reimann, Marc, Souza, Gilvan and Zhang, Weihua (2018) On the Robustness of the Consumer Homogeneity Assumption with Respect to the Discount Factor for Remanufactured Products. European Journal of Operational Research, 269 (3). pp. 1027-1040. ISSN 0377-2217

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Abstract

The strategic closed-loop supply chains (CLSCs) literature makes the assumption that a consumer’s willingness-to-pay (WTP) for a remanufactured product is a fraction of his/her WTP for the corresponding new product, and this fraction, called discount factor, is assumed to be constant among consumers. Recent empirical research challenges this assumption, by showing that there is considerable variability in discount factors among consumers. This paper considers a complex model in the CLSC literature: strategic remanufacturing under quality choice, and compares its solution under constant discount factors with the solution that assumes a probability distribution for the discount factors (which is analytically intractable and must be obtained numerically). We consider quality choice and remanufacturing for both monopoly and competitive cases. Overall, we find remarkable consistency between the results of the constant and variable discount factor models. Thus, we make a convincing argument that the constant discount factor assumption is robust and can be used due to its tractability.

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