Optimal Pricing for a Firm that Leases New Products and Sells Remanufactured Ones

In this paper we consider a firm that leases a single type of product and also sells remanufactured versions of this product that become available at the end of their lease periods. We assume that when the quantity of end-of-lease items in stock is not sufficient to meet the demand for remanufactured products, the firm has the option to purchase additional cores from a third-party core supplier at a certain unit cost. Customers have a lower willingness-to-pay for the remanufactured product and their preference is modeled using a maximum utility approach. We develop a multi-period model to determine the selling price of remanufactured products and the periodic lease payments of new products. We investigate the effect of key product characteristics such as deterioration in age and unit cost of purchasing cores from a third-party supplier, and key target market characteristics such as relative willingness-to-pay for buying a remanufactured product and relative willingness-to-pay for leasing a new product. The resulting problem is a nonlinear optimization problem which is solved by a variant of Nelder-Mead simplex search method. 1