Implications of "Right to Repair" on E-Waste, Consumer Surplus, and Firm Profit: Product Market, Electronic Secondary Market, and Repair Market
COM1 Level 3
MR1, COM1-03-19
Abstract:
Consumers, independent repair shops, and various organizations are demanding a situation in which repairing a product is easier and less costly. However, many electronic and electrical products produced by the original equipment manufacturers (OEM) can be repaired only by those OEMs as they often tightly control repair information (e.g., manuals, schematics, documentation), auxiliary tools (e.g., diagnostic tools), and parts of products. The "Right to Repair" (RTR) movement, which calls for government legislation that requires manufacturers to make repair information, tools, and parts available to consumers and independent repair shops, therefore, is meant to change that. As of now, the movement has gained support from individual consumers, independent repair service providers, and other organizations such as the US Public Interest Research Group.
However, on the topic of the "Right to Repair", controversy has continued. The advocates for this initiative argue that the "Right to Repair" can break the monopoly of manufacturers in the repair service market so that the repair price would drop and thereby benefit consumers more. Moreover, associated with the increasingly serious e-waste problem, the advocates believe that consumers empowered by the right-to-repair legislation would scrap and buy fewer products, which helps to reduce the environmental impact. However, many manufacturers contend that this act would hurt their bottom line and thereby lobby against it. To clarify these claims, the first study uses an analytical model to examine the impact of the "Right to Repair" on consumer surplus, firm profit, social welfare, and environmental impact. We identify three effects of the "Right to Repair": (1) manufacturers may abandon the repair service market; (2) it cannibalizes the replacement sales of products; (3) repair service can increase consumers' expected valuation of the product when they are buying new products. Different from advocates' claims, we find that the "Right to Repair" may improve manufacturers' profit when the production cost is high and may lower consumer surplus if the repair quality is good. Even though the "Right to Repair", partially as expected, hurts manufacturers and benefits consumers in some conditions, our analysis shows that it rarely benefits the environment any longer in the same condition. However, we also find that the "Right to Repair" can create a "Win-Win-Win" or "Lose-Lose-Lose" situation under the right conditions. Thus, legislatures may need to conduct case-by-case examinations of the pros and cons of the "Right to Repair" in different product and repair fields.
It is commonly seen that many products such as cellphones, laptops, motor vehicles, etc. have electronic secondary markets. Numerous studies have shown a close tie between them and the primary markets. Moreover, access to easier repair services will affect the supply to the secondary market. In this case, we suppose the effect of the "Right to Repair" may change if there exists a secondary market. The second study employs an analytical model to scrutinize the potential interaction among product markets, repair markets, and secondary markets. We find that different from the case without a secondary market, manufacturers have a higher capability to raise product prices given the RTR with a secondary market. Given the secondary market, the resale value caused by it mitigates the downward pressure from the RTR and thereby the new product price can be even higher in the RTR case than in the no RTR case. Therefore, when the production cost is not high and there exists a secondary market, the RTR will hurt the consumers because the secondary market undermines the positive expected effect of RTR on consumers. We also find that contrary to conventional wisdom, giving consumers the right to repair may boost profit, but in other cases, may lead to lower consumer surplus and/or higher environmental impact. Under the right condition, the right-to-repair legislation can be a "win-win-win" proposition that benefits manufacturers, consumers, and the environment alike. Under some other circumstances, though, it may lead to a "lose-lose-lose" outcome that is both socially and environmentally undesirable.
In the third study, we build an analytical model to investigate the relation between price competition and the "Right to Repair". This study is necessary for three reasons: (1) Manufacturers, although they are giant businesses, are also in the face of competition from other manufacturers in the real world. (2) We find that the used products play a new role in a competitive setting in addition to the commonly-believed cannibalization effect. (3) We show that consumers are not always worse off when the competition is softened, which mainly is driven by the cannibalization effect of repair services. This study reveals four drivers that impact manufacturers' price competition: (1) differentiation-smoothing effect by which the product differentiation level between manufacturers is reduced when consumers will continue to use their products after their new products become old; (2) demand-cannibalization effect by which the manufacturers would lower the new product price to guard against the demand cannibalization from used products or in other words the repair services; (3) burden-relieving effect of the right-to-repair legislation by which the manufacturers can leverage the cost-efficient independent repair to repair products at zero cost; (4) value-enhancement effect by which the manufacturers can raise the new product prices because consumers' valuation of the new products is enhanced thanks to the repair services. The former three effects put upward pressure on manufacturer competition while the last one put downward pressure on manufacturer competition. When the production cost is not high, the price competition is softened in response to the "Right to Repair" because the last effect dominates the former three while when the production cost is high, the price competition is intensified because of the burden-relieving effect of the right-to-repair legislation. In addition, we also find that the "Right to Repair" can hurt both consumers and the environment when manufacturers' repair cost is low, the production cost is intermediate, and the use impact of the old products is the primary contributor to products' environmental impact.
All told, this thesis tells a cautionary tale about the "Right to Repair". The right-to-repair legislation, which is meant to facilitate independent repair, may trigger a non-monotone price response from the manufacturer in the product market, which further induces a non-monotone change in consumer surplus and the environmental impact. As a result, we suggest that when evaluating the right-to-repair legislation, policymakers should take into account this inextricable relation between the product market and the repair market. A case-by-case analysis is likely warranted.