Product Recalls, Category Effects and Competitor Response
27 Pages Posted: 9 Jan 2015 Last revised: 18 Jan 2015
Date Written: January 10, 2015
Product recalls are ubiquitous in a variety of industries such as food, cosmetics, hi-tech and pharmaceuticals. However, recalls differ in their category level impact depending on the product category as well as the underlying reason for the recall. We focus on product categories where sales force effort is the main driver of sales and an individual firm's product recall may have negative consequences for the entire category. In such contexts, competitors in the category would have to respond to the recall through their sales effort. Often, this decision is complicated by the fact that the sales effort has to be allocated across a portfolio of products across categories not all of which are directly affected by the recall. We use some empirical evidence in the pharmaceutical industry to illustrate that the prevalent wisdom is to increase sales effort towards the product directly affected by the recall. We formulate a game-theoretic model to show that this might not always be the optimal strategy for the firm. We provide a prescriptive road map for firms facing this decision based on several factors such as the anticipated category level loss, relative prices across the categories, the carryover effect of prior sales effort and (dis)economies of scope in sales resource use across categories. We find that the interaction between relative price across categories and the carryover effect with the level of scope in sales resource use is of particular importance in the firm's eventual sales effort allocation.
Keywords: product recalls, category effects, competition, sales effort
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