Abstract

The effects of product recalls can be utterly disastrous for the firm responsible for the recall. A recalling firm may bear substantial external failure costs along with sales loss due to a tarnished
goodwill. Deciding the pre-recall and post-recall advertising, price and quality are crucial for both the recalling firm and its rivals. Using a differential game theoretic modelling approach, we develop
and analyze theoretical models associated with a product recall and study the effect of the same on supply chain decision making. In our first essay, we analyze a scenario with two manufacturers
under goodwill-advertising competition. Either one firm or both firms can be susceptible to recall a product, and both are aware of the recall likelihood ex-ante. We examine the pre-crisis
and post-crisis equilibrium advertising efforts and effect of recall on firms’ profits when firms are farsighted or “hazard myopic. We show that the variance of advertising in the two periods and the
profits of the firms depend on crisis likelihood and impact. The trade-off between the likelihood of crisis and its impact explains the previous conflicting findings of the literature. In our second
essay, we investigate joint decisions of pricing and advertising for mitigating the harmful effects of a product recall on a firm and the negative spillover effect on a rival firm. We recommend the
equilibrium pricing and advertising policies of the two competing firms under product recalls of different impact and likelihood. We compare the case when the focal firm is a market leader to
the case when both firms are similar. In the third essay, we define two contracts for managing “collateral damage” during a product recall. We show that adopting a cost-sharing contract can
be beneficial for suppliers and manufacturers. We found that cost-sharing decisions, advertising efforts and quality efforts vary under different scenarios. There may be individual motivation for
the firms to move against a contract under different crisis likelihood and impact. Nevertheless, the supply chain profit is always higher under a contract.