Refund policies and core classification errors in the presence of customers’ choice behaviour in remanufacturing

Abstract

In light of a circular economy, to encourage core returns, the remanufacturer charges a deposit and refund it to the customer based on quality inspection of cores. Generally, two types of classification errors exist and interact with each other during the inspection process: either low-quality cores are sorted as remanufacturable, or high-quality cores are sorted as non-remanufacturable. The remanufacturer needs to choose refund policies and determine a reasonable deposit value, considering customers’ potential responses. This paper firstly develops analytical solutions for these issues within a game theory framework. The effect of inspection information transparency is evaluated by comparing two settings: the information of inspection errors is available to customers or not. The study results show the advantage of inspection information transparency from the remanufacturer’s perspective. The analysis indicates the importance of avoiding overestimating customers’ payoff of products and the significance of inspection accuracy. The study also highlights that the salvage value of different cores significantly influences the remanufacturer’s profits, and the improvement of inspection accuracy does not necessarily reduce the customer’s return of low-quality cores.