Laissez-Faire versus Government Intervention : Implications of Regulation Preventing Nonauthorized Remanufacturing

Problem definition: In this paper, we compare laissez-faire and mandatory authorization policy regimes for third-party remanufacturing. Under a laissez-faire policy, an independent remanufacturer (IR) chooses whether to get the original equipment manufacturer (OEM) authorization for its remanufacturing. Under a mandatory authorization policy, the IR is required to get OEM authorization and to pay the OEM a fee for every item remanufactured. Motivated by China’s regulatory journey that first mandated authorized remanufacturing and then moved to a laissez-faire policy, our goal is to understand which policy yields higher remanufacturing, firm profits, and consumer surplus.Methodology/results: We use a game theoretic approach and consider a supply chain consisting of a supplier, an OEM, and an IR under the two policy regimes. Conventional wisdom suggests that the IR would be better off under the laissez-faire policy but the OEM and supplier would be better off under the mandatory authorization policy as they would have better control over the IR competition. Our results, however, show that this conventional wisdom does not always hold. Specifically, we show that for products with a moderate remanufacturing cost, not only the IR but also the OEM and the supplier are better off under the laissez-faire policy. On the other hand, for products with a low remanufacturing cost, not only the supplier and the OEM but also the IR are better off under the mandatory authorization policy. Through several extensions, we also show the robustness of our results.Managerial implications: Our findings reveal that seemingly advantageous policy regimes may backfire for the firms. For example, the IR may benefit from a mandatory authorization policy as it may be able to remanufacture higher quantities and achieves higher profit. On the other hand, the OEM may benefit from a laissez-faire policy as it may benefit from lower wholesale prices from the supplier to keep the IR competition under control. With the introduction of mandatory authorization, the OEM would lose such benefits and be worse off. Therefore, before supporting seemingly advantageous policy regimes, the firms need to understand the strategic reactions of other parties and the impact of these on their profits