Loyalty or Indifference? Strategic Trade-in Design in Consumer-Segmented Markets

In the durable goods industry, trade-in programs have assumed a pivotal role, yet the fundamental principles governing firms’ choices of trade-in models under market segmentation remain underexplored. This study introduces a loyalty-driven market segmentation framework, categorizing consumers into replacement groups (loyal consumers and indifferent consumers) and new consumers. By constructing an optimization model for a monopolistic firm, we analyze three trade-in models, trade-in for new, trade-in for cash, and hybrid trade-in, examining pricing, rebate, model selection strategies, and consumer surplus. The research reveals that the firm offers the most generous rebates under the trade-in for new model when the proportion of loyal consumers is extremely low. As this proportion increases, the hybrid trade-in model provides higher rebate intensity. When the proportion of loyal consumers is extremely high, the rebate intensity under the trade-in for cash model exceeds that of the other two models. The choice of trade-in model hinges on the threshold proportion of loyal consumers and replacement consumers: in high-loyalty markets, hybrid trade-in model achieves optimal performance. Conversely, in low-loyalty markets, trade-in for cash model prevails when the proportion of replacement consumers exceeds a specific threshold. Trade-in for new model becomes preferable when the proportion of replacement consumers is low. Hybrid trade-in model consistently maximizes the consumer surplus of indifferent consumers due to its flexibility, while loyal consumers benefit more from the trade-in for new model when their market share is dominant.