Circular Business Models: Product Design and Consumer Participation

This paper develops an analytical framework to study the mechanics of circular business models in markets where consumers care about recyclability and make both a purchase decision and a disposal decision when the product reaches end-of-life. Transitioning to a circular business model allows the firm to tap into a new source of revenue by recycling end-of-life products and charge a green premium for products with higher recyclability. We show that the firm determines recyclability by balancing the marginal changes in the expected end-of-life utility of the product perceived by consumers and the unit cost net of the expected value of the recovered resources. We also show that stronger consumer concerns about recyclability and a higher market value of the recovered resources increase recyclability, but have an ambiguous impact on price, profit, and the waste footprint of the firm. In addition, we identify the conditions under which the transition from a linear to a circular business model is profitable and socially desirable, and show how policy makers can accelerate the circular transition. Finally, we show that competition has no impact on recyclability but tends to undermine the viability of circularity, and present options for policy makers to improve the performance of circular business models.

This paper develops an analytical framework to study how firms should design a product by choosing its recyclability and price when consumers adopt a life-cycle approach and decide whether to recycle an end-of-life product. We show that, under a linear business model, the firm offers a non-recyclable product even if consumers care about recyclability. Under a circular business model, 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. In addition, we show that stronger consumer 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 waste footprint of the firm. Further, we characterize conditions under which transitioning from a linear to a circular business model is profitable and socially desirable. Finally, we examine how the firm can boost circularity by leveraging deposit-refund systems, product buyback, or retaining product ownership.