Circular Business Models: Product Design and Consumer Participation
Abstract
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. We show that the firm offers a non-recyclable product in the absence of a reverse supply chain even if consumers care about recyclability – the linear take-make-dispose model. By operating a reverse supply chain, the firm generates revenue from both sales and recycling, and determines recyclability by balancing the marginal changes in the consumers' expected end-of-life utility and 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, 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.