How Does Product Recovery Affect Quality Choice?

Abstract

We study the impact of product recovery on a firm's product quality choice, where quality is defined as an observable performance measure that increases a consumer's valuation for the product. We consider three general forms of product recovery: (i) when product recovery reuses (after reprocessing) quality inducing components or material (e.g., remanufacturing), (ii) when product recovery does not reuse quality inducing components or material but it is overall profitable (e.g., cell phone recycling), and (iii) when product recovery is costly (but mandated by legislation, e.g., recycling of small appliances in the European Union). Using a stylized economic model, we show that the form of product recovery, recovery cost structure, and the presence of product take‐back legislation play an important role in quality choice. Generally speaking, product recovery increases the firm's quality choice, except for some instances of recovery form (ii). In addition, we find that product take‐back legislation can lead to higher quality choice as opposed to voluntary take‐back. We further demonstrate that both the firm and the consumers benefit from recovery form (ii), while both are worse off with recovery form (iii). However, environmental implications of the three recovery modes differ from their impact on consumer surplus and firm profit. While recovery forms (i) and (iii) reduce consumption and increase environmental benefits, the same is not true with recovery form (ii), which can increase consumption, potentially resulting in higher environmental impact.