Dynamic pricing in a trade-in program with replacement and new customers

Trade-in programs have been widely adopted to enhance repeat purchase from replacement customers. Considering that a market consists of replacement and new segments, we study the joint and dynamic decisions on the selling price of new product (hereafter, “selling price”) and the trade-in price involved in the program. By adopting a vertical product differentiation choice model, we investigate two scenarios in this paper. In the base model, the manufacturer has sufficiently large production capacity to fulfill the customer demand. We characterize the structural properties of the joint pricing decisions and compare them with the optimal pricing policy under regular selling. We further propose a semi-dynamic trade-in program, under which the new product is sold at a fixed price and the trade-in price can be adjusted dynamically. Numerical experiments are conducted to evaluate the performance of the dynamic and semi-dynamic trade-in programs. In an extended model, we consider the scenario in which the manufacturer stocks a batch of new products in the beginning of the selling horizon and the inventory cannot be replenished. Following a revenue management framework, we characterize the structural properties with respect to time period and inventory level of new products.