Managing demand slowdown: The interplay between trade‐ins and quality improvement

Abstract

Quality improvement and trade‐ins are widely used by firms to manage the demand slowdown. However, how these two strategies interact with each other is unclear. In this paper, we construct a stylized model where a monopoly sells the new product to a market comprising both new and replacement consumers. We examine and compare the firm's optimal decisions, demands, and profits under four cases with quality improvement and/or trade‐in program. We identify several interesting results. First, quality improvement may lead to a lower retail price, while the trade‐in program consistently results in a higher price. Additionally, the trade‐in program encourages the firm to increase quality improvement level and sell the product with a higher price increase per unit of quality improvement. Second, although the trade‐in program and quality improvement strategy can certainly help increase the new product's demand, they may be partially substitutive under some conditions. Interestingly, their complementary effect in improving the firm's profit always exists. Third, quality improvement constantly improves consumer surplus and social welfare; however, it brings a larger environmental burden. Conversely, although the trade‐in program might reduce consumer surplus and social welfare, it can potentially reduce the environmental impacts when unit production cost is relatively low. Finally, our main findings above are relatively robust when considering the internal competition from remanufactured products, external competition from the secondary market, or the impacts of strategic consumer behaviors.