The Rise of Recommerce: Ownership and Sustainability with Overlapping Generations

Abstract: The emergence of the branded recommerce channel - digitally enabled and branded marketplaces that facilitate purchasing pre-owned items directly from a manufacturer's e-commerce site - leads to new variants of classic IS and economic questions relating to secondary markets. Such branded recommerce is increasingly platform-enabled, creating opportunities for greater sustainability and stronger brand experience control but posing a greater risk of cannibalization of the sales of new items. We model the effects that the sales of pre-owned items have on market segmentation and product durability choices for a monopolist facing heterogeneous customers, contrasting outcomes when the trade of pre-owned goods takes place through a third-party marketplace with outcomes under branded recommerce. We show that the direct revenue benefits of branded recommerce are not their primary source of value to the monopolist, and rather, there are three indirect effects that alter profits and sustainability. Product durability increases, a seller finds it optimal to forgo marketplace fees altogether, and there are greater seller incentives to lower the quality uncertainty associated with pre-owned items. We establish these results for a simple two-period model as well as developing a new infinite horizon model with overlapping generations. Our paper sheds new insight into this emerging digital channel phenomenon, underscoring the importance of recommerce platforms in aligning seller profits with sustainability goals.

• The paper presents a comprehensive model showing how branded recommerce improves product durability and aligns firms’ profitability with sustainable practices.
• The paper demonstrates that adopting a zero-commission strategy indirectly optimizes economic value by reducing quality uncertainty and enhancing consumer trust.
• The paper extends its analysis with an infinite horizon model incorporating overlapping generations to capture long-term sustainability and market dynamics.

The Rise of Recommerce: Ownership and Sustainability with Overlapping Generations

The paper "The Rise of Recommerce: Ownership and Sustainability with Overlapping Generations" explores the concept of branded recommerce, a platform-enabled marketplace where manufacturers sell pre-owned items directly to consumers from their e-commerce sites. This study provides a comprehensive analytical model to examine how these recommerce channels influence product durability choices, market segmentation, and overall sustainability for monopolistic firms facing heterogeneous customer bases.

Overview and Model Framework

Branded recommerce platforms such as those developed by Trove and Recurate, exemplified by sites like Lululemon's Like New and Zara's Pre-Owned (Figure 1), represent a growing segment within the $100 billion global pre-owned apparel market, projected to double by 2026. This paper models the economic interactions inherent in these channels through both a simplified two-period model and a more complex infinite horizon model incorporating overlapping generations.

Figure 1: Examples of two branded recommerce sites.

Two-Period Model

The initial model studies the impact of pre-owned product sales on a firm's strategic decisions considering two distinct buyer types: high valuation (H) and low valuation (L) consumers. In this context, branded recommerce provides indirect economic benefits by aligning profitability with sustainability, primarily through enhanced durability and reduced quality uncertainty, thus supporting market participation of low-valuation consumers via pre-owned channels.

Infinite Horizon Model with Overlapping Generations

Extending the insights from the two-period model, the infinite horizon model considers the continuous influx of consumers who have a purchase lifespan across two periods. This approach maintains that durable product design and increased recommerce adoption influence long-term economic viability and sustainability alignment for firms that operate their second-hand marketplace.

Key Findings and Implications

Economic and Sustainability Benefits

The study finds that branded recommerce not only supports sustainability through enhanced product durability but also aligns with overall profit maximization strategies:

1. Durability and Profit Alignment: Firms' incentives to produce more durable goods increase under branded recommerce, leading to a rise in the quality of pre-owned items and a decrease in costs related to product replacement and lower perceived quality.
2. Zero-Commissions Strategy: Manufacturers optimally set transaction fees to zero, indicating that the economic value of recommerce is derived indirectly, rather than through direct revenues from marketplace operations.

Quality Uncertainty Reduction

A noteworthy conclusion is that branded recommerce decreases quality uncertainty. This happens as the manufacturer, rather than an unknown marketplace, sells pre-owned items, prompting greater investment in quality assurances and consumer trust mechanisms.

Future Directions and Research Opportunities

The paper highlights several areas for future exploration, including the coexistence of branded recommerce with third-party marketplaces and its effects on market dynamics and firm strategies. Additionally, potential empirical validations using field data, such as emerging patterns in product durability post-recommerce adoption, present valuable research opportunities.

In conclusion, the paper underscores that while the immediate motivations for firms might revolve around consumer experience control and market positioning, the broader implications of branded recommerce are closely tied to creating sustainable consumption patterns and achieving long-term profitability through strategic product and market alignment.