Modular design under price competition between a mass customization manufacturer and a free‐riding remanufacturer

Abstract Given that the mass customization (MC) manufacturer faces a dilemma in determining the modularity level due to cannibalization threats from the free‐riding remanufacturer, this paper investigates the modular design of MC products and the competitive pricing of both members. The study develops a two‐period supply chain game model to examine the conditions under which the remanufacturer engages in partial or full remanufacturing, which can influence the strategic interactions between both members. Additionally, effective strategies for the MC manufacturer to deter the free‐riding remanufacturer are explored. The findings reveal that, when the remanufacturing cost saving caused by modular design is at a low level, the remanufacturer opts for partial remanufacturing to compete with the MC manufacturer; otherwise, they compete in full remanufacturing. Surprisingly, under full remanufacturing, the MC manufacturer can adopt a higher‐price strategy instead of a lower‐modularity strategy in the initial period, thereby effectively deterring the remanufacturer and securing a larger market share in the subsequent period.