Dynamic pricing and advertising decisions to mitigate the negative spillover effect of a product recall

Abstract

Severe loss of reputation and its lasting effect on a firm’s sales are the consequences of a product harm crisis. Research shows that a product recall can result in a loss of goodwill for the firm responsible for the recall and its rival, especially when the rival is from the same country of origin. Alternatively, rival firms from different countries of origin may benefit from the recall. Firms often adjust pricing and advertising decisions in the post-recall period to mitigate a product recall’s harmful effect on profit. In our study, we investigate the negative spillover effect of a product recall on a firm. Using a differential game-theoretic framework, we analyze how pricing and advertising decisions for a firm and its rival differ in the pre-crisis and the post-crisis regimes. We also examine the impact of the crisis on firms’ profits. Based on our analysis, we highlighted suitable strategies for different recall impacts and likelihoods. We also find that the focal firm’s market leadership may not always be profitable during a product recall. Our findings highlight the importance of crisis likelihood and damage on which the firms’ decisions depend.