Location: Thursday, July 7th, 9:00-10:30am, Room 311A

Area: Operations Management

Committee members: Dr. Atalay Atasu (co-chair), Dr. Beril L. Toktay (co-chair), Dr. Necati Tereyagoglu, Dr. Eric Overby, Dr. Vishal Agrawal (Georgetown University), Dr. Luyi Gui (University of California Irvine)

Title: Primary and Secondary Market Strategies for Regulatory Compliance and Profit

My thesis consists of three essays that study sustainable operational strategies for firms to comply with environmental legislation or to enhance profitability. In my first essay, I study durable product producers who are responsible for the proper treatment of their end-of-life products under the take-back legislation based on Extended Producer Responsibility (EPR). By assigning producer responsibility, EPR-based legislation has the potential to not only achieve landfill diversion, but also incentivize eco-friendly product designs. Therefore, I focus on the product design implications of EPR-based legislation. In particular, I observe that durable product design incentives under EPR may involve an inherent trade-off that has not been explored to date: Durable product producers can respond to EPR by making their products either more recyclable or more durable, where the former will decrease the unit recycling cost while the latter will reduce the volume the producer has to recycle. When these two design attributes do not go hand-in-hand, as is the case for many product categories, product design implications of EPR can be subtle. I find that seemingly similar EPR implementation levers, namely recycling and collection targets, may have opposing effects in driving producers’ design choices. Furthermore, more stringent legislative targets do not always guarantee improved product recyclability and durability. In particular, if the objective of EPR is to induce recyclable product designs, a low recycling target accompanied with a high collection target is preferred. On the other hand, if the objective of EPR is to induce durable product designs, a low collection target accompanied with a high recycling target is preferred. In my second essay, I study how remanufacturing helps to increase secondary market quality for durable products when the used product quality is not observable by the buyers prior to purchase (e.g., the lemon problem exists). To be specific, used durable products sold in the secondary market may be of high or low quality (which can be referred to as “peaches” and “lemons” respectively) due to previous usage and depreciation. The quality of any particular product is only known to the seller who originally owns it, but not to the buyers. Under this asymmetric information, buyers will offer a price that reflects only the average quality in the market. However, this price will be lower than the fair price of a peach and higher than that of a lemon. As such, lemon owners are willing to sell while peach owners are willing to hold on to the products. As a consequence of such strategic peach-holding behavior, the secondary market is filled with more lemons than peaches, which lowers the average market quality. In the literature, trade-in programs offered by the producers have been proposed as a remedy. However, even with the trade-ins, the lemon problem is not completely solved, as the strategic peach-holding behavior still persists and dilutes the average quality. In my dissertation, I show that OEM remanufacturing can also be used as a remedy to the lemon problem. I show that remanufacturing can be used to eliminate the strategic peach-holding behavior entirely, which means owners who sell used items into the secondary market do so regardless of whether they have peaches or lemons. In that case, the asymmetric information on product quality no longer reduces the average quality in the secondary market, and hence the lemon problem can be solved. In my third essay, I develop testable hypothesis to lay the foundation for empirical research on this topic based on these insights from the analytical analysis.