Profit maximization for semiconductor manufacturers: Scrap or not scrap?

In the semiconductor industry, the fall-outs of the production, or yield loss, are no longer doomed to be scrapped. Thanks to the technology advancement, they can be, and are now, sold to a value conscious market (the low-end market). While the manufacturers are thrilled by this creative idea - turning scrap cost into sales profit, we wonder whether such practice is always beneficial? What are the conditions under which the manufacturers should consider switching back to the old practice - scrapping at a cost? Building upon a standard marketing model for two differentiated markets, we are able to characterize optimal decisions, including operational strategies-whether to scrap the low quality product and whether to downgrade the high quality product, and the corresponding production capacity, supply quantity to each market, and price for each market. We find that when both the yield and the scrap cost are small, the manufacturer should switch back to the old practice. Otherwise, the manufacturer could lose up to 72.7% profit increase, shown by our comprehensive numerical study. Moreover, we observe that the manufacturer may over sacrifice the low-end market with negative profit when balancing the profit earned from each market. Counter intuitively, the manufacturer may be worse off when l-market consumers are willing to pay more.