Trade-in Strategy For The Durable-Goods Firm With Products Upgrade

With the development of society and economics, durable goods have become one of the most important components in the national economy and at the same time, have more frequent contact and closer links with people's lives. Durable goods such as cellphones, computers and automobiles bring lots of convenience to our communication, work and travelling, and even become integral parts of our daily life. Nowadays, the upgrade speed of durable goods accelerates with the help of the rapid development of science and tech-nology. Therefore, only firms invest more in research and development and develop new generation goods with better performance and more powerful features can they gain a com-petitive advantage and win a greater living space, especially in diversifying markets with increased competition and volatility. In practice, there are plenty of well-known enterprises, such as Lenovo, Huawei and Apple, deem the successive launch of new generation goods in the marketplaces a key competitive weapon, since this not only facilitates the sustainable development of those enterprises themselves, but also helps customers derive more values from the upgraded and new goods. However, durable goods, as a type of ubiquitous goods with high value, are reusable in their long service life and hence, leads to a relative long purchase cycle. Consumers who have bought durable goods usually have less motivations to buy new ones because of the high cost of upgrades. Realizing those conflict and contra-diction, durable goods firms adopt a lot of measurements, including the trade-in strategy, to encourage and motivate end-consumers to upgrade their goods in order to enlarge market demand.Firms who offer the trade-in strategy promise that they will buy back the used goods from the consumers and give them a certain cash, loyalty cards or coupons by which they are able to get the corresponding price discount when purchase the upgraded and new good-s. Though the trade-in strategy seems to be a simple and effective method for motivating consumers to buy new goods, firms confronts a series of critical issues during the imple-mentation of this policy. For instance, whether firms are better off to offer the trade-in strategy? If so, how they set the trade-in price and the retail prices of new goods to max-imize revenues? From the standpoint of the consumers, in the presence of durable goods upgrade, do they have strong motivations to join the trade-in strategy? Should consumers upgrade the used goods to new ones, especially when other transaction channels such as the spot markets are available to dispose their used goods? What is the effect of the trade-in strategy on social environment? As we know, it will inevitably do harm to the social en-vironment during the manufacture and production processes of new goods and thus, does this mean trade-in is an eco-unfriendly strategy?To answer the above questions, this dissertation conducts an in-depth study on how the trade-in strategy affects the firm, consumers and social environment under durable goods upgrade, from the perspectives of profit, consumer surplus and total demand for new prod-ucts, respectively. In particular,'we use game theory, optimization theory, management, economics, decision sciences and marketing sciences, etc., multi-disciplinary theories and methodologies to develop game theoretical models with and without trade-in strategy under different scenarios. Then, we solve the problems backward and compare the equilibrium outcomes, as well as make sensitivity analysis to gain insights. The main purpose of this dissertation is to provide firms with decision-making references on the implementation of the trade-in strategy and durable goods pricing; to give consumers suggestions about the optimal choices on purchasing and upgrading of durable goods; and to theoretically reveal how the trade-in strategy influence the social environment. Specifically, under the progres-sive structure, the main work done in this dissertation is as follows:The impacts of the trade-in strategy on the manufacturer, consumers and social en-vironment under endogenous spot market price are analyzed. We consider a two-period dynamic model in which a monopolistic manufacturer sells its new durable goods in the first period, then, at the beginning of the second period, it launches the upgraded and new goods. Consumers are strategic, they maximize individual total utility over two periods according to the optimal purchasing and upgrading decisions in each period. We develop game theoretic models with and without the trade-in strategy, respectively, and make com-parisons of their equilibrium outcomes. We derive conditions under which it is profitable for the manufacturer to offer the trade-in strategy. Moreover, we conduct a set of sensitiv-ity analysis from the perspectives of the salvage value, the sensitivity of the spot market price and the upgrade level of new goods. The results show that, under the case where the spot market price is endogenous, the salvage value, the upfront fee and the sensitivity of the spot market price have significant influences on the manufacturer's adoption of the trade-in strategy. In particular, the higher the salvage value, the greater the total demands for new goods, the manufacturer's total profit, and the consumer surplus. The bigger the sensitivity of the spot market price, the less the manufacturer's total profit. Whereas both the total demand for new goods and consumer surplus are low under a medium level of sensitivity of the spot market price. In addition, an intermediate upgrade level of new goods helps the manufacturer gain the best profit. In this case, it is also beneficial to social environment because of the lowest total demand for new goods. However, consumers suffer because of less consumer surplus, meaning that the manufacturer's gains build upon the sacrifice of consumers'benefits.The impacts of the trade-in strategy on the manufacturer, consumers and social envi-ronment under uncertain spot market price are analyzed. Under the framework of a two-period game, we consider a monopolistic manufacturer sells its new durable goods in period one, and launches the upgraded and new goods at the beginning of period two. Strate-gic consumers seek to maximize their individual expected total utility over two periods. However, consumers do not know the exact spot market price in the second period when purchase new goods in the first period. We develop decision models with and without the trade-in strategy, respectively, and compare their equilibrium outcomes. Also, we explore the influence of the trade-in strategy when the manufacturer adopts the static and the dy-namic pricing policy, respectively. The results show that, in the presence of uncertain spot market price, the manufacturer is better off by offering the trade-in strategy, which also benefits consumers in most cases, regardless of whichever pricing policy the manufacturer uses. However, the trade-in strategy is harmful to social environment because it enlarges the total demand for new goods. Additionally, we make sensitivity analysis and reveal how the salvage value and the upgrade degree of new goods affect the firm, consumers and social environment.The impacts of the trade-in strategy on the manufacturer, consumers and social envi-ronment under both uncertain upgrade value of new goods and the spot market price are analyzed. We consider a two periods dynamic model in which a monopolistic manufactur-er sells new durable goods and offers the trade-in strategy in period one, and launches the upgraded and new goods in period two. However, the value of the upgraded and new goods is uncertain, i.e., a consumer's valuation of the goods in period two could be higher or low-er than that in period one. Consumers are strategic and forward-looking, they seek to the maximum of the expected total utility by choosing the optimal purchasing and upgrading decisions, as well as whether or not to join the trade-in strategy. Moreover, the spot market price will not be realized until the very beginning of period two. We analyze consumers' options in each period and segment them based on indifference points of total utility, then write out the functions of total demand for new goods, the manufacturer's expected total profit and consumer surplus. Afterwards, we develop the benchmark model without the trade-in strategy and make comparisons of the equilibrium outcomes of those two models. The results show that the expected value and coefficient of variation of upgrade, the spot market price, and the salvage value play critical influences on the manufacturer's adoption of the trade-in strategy. Compare to the case without the trade-in strategy, the manufacturer gains larger total demand for new goods and expected total profit when it offers the trade-in strategy, which also improves consumer surplus. Furthermore, the manufacturer is better off under lower expected value and coefficient of variation of upgrade and/or a higher prob-ability of the downside spot market price. However, the trade-in strategy is harmful to the social environment, especially when the levels of expected value and coefficient of varia-tion of upgrade and/or the probability of the downside spot market price are lower enough. From the perspective of consumers, they prefer the lowest/highest level of expected value of upgrade to an intermediate one. In addition, low levels of expected value and coefficient of variation of upgrade and/or a smaller probability of the downside spot market price also contribute to the improvement of consumer surplus.