A two-period model of product cannibalization in an atypical Closed-loop Supply Chain with endogenous returns: The case of DellReconnect

In this paper we develop a two-period model of an atypical Closed-loop Supply Chain (CLSC) consistent with the DellReconnect project. In our setting, a manufacturer (Dell) sells new products in the first period and faces the threat of cannibalization in the second period from a Goodwill agency, which collects and refurbishes the manufacturer’s goods and sells them as used products. Surprisingly, and unlike the findings from the marketing literature, cannibalization does not lower the manufacturer’s sales in both periods; however, it does negatively impact the manufacturer’s profits and positively affect the Goodwill agency’s profits. We demonstrate that in an atypical CLSC, a reduction in the price of new products is never sufficient to counter the negative effect of cannibalization. We then introduce an advertising strategy, through which the manufacturer complements its pricing strategy, endogenizes the returns, and positively affects both the new and used product demands. Although the advertising strategy positively influences the product returns, it continues to be insufficient to counter the negative effect of cannibalization. Interestingly, we now find that cannibalization is detrimental even for the Goodwill agency, whose profits decrease when the cannibalization level exceeds a certain threshold. Finally, we show that when a “product resale value” option exists, the manufacturer can convert the cannibalization threat into a business opportunity and increase its profits, independent of an advertising strategy. Thus, the manufacturer should always collect through a Goodwill agency when sufficiently large resale value options exist.