Proprietary Parts as a Secondary Market Strategy

Introducing proprietary parts to gain a competitive edge is a well-known, yet poorly understood strategy original equipment manufacturers (OEMs) adopt. In this paper, we consider an OEM who sells new products and competes with an independent remanufacturer (IR) selling remanufactured products. The OEM contemplates proprietary parts to manage the secondary market for remanufactured products. Thereby, the OEM designs its product to balance the trade-off between the cost of proprietariness and the extra income from selling the proprietary spare parts to the IR. Deterring market entry by the IR through prohibitively pricing the proprietary spare parts, an OEM strategy observed in several industries, is only optimal when the willingness-to-pay for remanufactured products is low. Otherwise, the OEM benefits more from sharing the secondary market profits with the IR through the use of proprietary parts. Finally, we find that the OEM can also use proprietary parts to strategically deter entry by the IR, discouraging her from collecting cores. This can support the OEM’s decisions to engage in remanufacturing even in the case of a collection cost disadvantage. While the introduction of proprietary parts is detrimental to both IRs and consumers, we show that for consumers such loss is reduced when the OEM engages in product remanufacturing.