Circular Business Models: Product Design and Consumer Participation
This paper develops an analytical framework to study how firms should design a product by choosing its recyclability and price in a market where consumers adopt a life-cycle approach and decide whether to recycle an end-of-life product. In the absence of a reverse supply chain, we show that the firm offers a non-recyclable product even if consumers care about recyclability---the linear take-make-waste model. By operating a reverse supply chain, the firm generates revenue from both sales and recycling, and determines recyclability by balancing the marginal change in the consumers' expected end-of-life utility and the marginal change in the unit production cost net of the expected value of the recovered resources. We identify conditions under which the firm offers a fully recyclable product and all consumers return the product for recycling---the fully circular model. In addition, we show that stronger concerns about recyclability and a higher market value of the recovered resources increase recyclability in a partially circular model, but have an ambiguous impact on price, demand, profit, and the overall waste footprint of the firm. Further, we characterize the conditions under which transitioning from a linear to a circular business model is profitable and socially desirable. Finally, we show when a deposit-refund system, product buyback, and retaining product ownership are effective tools to boost circularity.
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