Supply chains today routinely use third parties for many strategic activities, such as manufacturing, R&D, or software development. These activities often include relationship-specific investment on the part of the vendor, while final outcomes can be uncertain. Therefore, writing complete contracts for such arrangements is often not feasible, but incomplete contracts, especially when relationship-specific investment is required, may leave the supplier vulnerable to a version of the ''hold-up problem,'' which is known to result in sub-optimal levels of investment. We model the phenomenon as a sequential move game with asymmetric information. Absent behavioral considerations, the unique Perfect Bayesian Equilibrium implies zero investment. However, with social preferences, the holdup problem may be mitigated. We propose a model that incorporates social preferences and random errors, and solve for the equilibrium. In addition, we look at reputation and find it to be effective for increasing investment. We conduct laboratory experiments with human subjects and find that a model with social preferences and random errors organizes our data well.

We investigate firms’ remanufacturing strategies for the case of a duopoly. On the one hand, remanufactured products cannibalize sales of new products of the same firm thereby hurting its profits. On the other hand, they can be part of a profitable marketing strategy that targets different customer preferences by providing a larger number of alternatives to customers. This paper studies the tradeoff between these effects and how it is influenced by competition. We develop a model where demand functions for new and remanufactured products of each firm are derived from utility maximization by a representative consumer. This allows us to capture preference and substitution effects between all offered products in the market. We discuss how equilibrium strategies are affected by factors such as competition, substitutability, production cost as well as remanufacturing cost. For example, when competitive intensity between new and new products, and remanufactured and remanufactured products, is (high), both (neither) firms offer remanufactured products in a symmetric equilibrium. If substitution between new and remanufactured products of the same firm is low, but the remanufactured product has a lower margin than the new product, firms can be worse off from remanufacturing.

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