Product Recall Delay and Product Cycle
58 Pages Posted: 5 Aug 2018
Date Written: July 17, 2018
When a safety defect occurs, manufacturers often use product recalls to mitigate potential consequences. Our empirical observation on large recalls in the automobile industry suggests that the timing of a recall is a key decision in this recall process, as we find that only recalls made in an early stage of a product cycle significantly influence future product sales. Motivated by this observation, we study the optimal recall timing for a profit-maximizing manufacturer by endogenizing a product's life cycle into our model. Specifically, firms need to make a trade-off between future product sales loss due to a recall and the penalty and costs for a delayed recall. When a product defect is discovered at an early stage of the product cycle, we find that a firm may strategically delay the timing of a recall to mitigate the negative shock evoked by this recall. However, the delay duration (i.e., the time from when a defect is identified to the recall time) depends on the margin of the product as well as the penalty with respect to recall delays. For a high margin product (with respect to unit recall costs), firms should always delay such recall decisions; however, for a low margin product, such delay decisions are not always optimal. Finally, we use an empirical analysis to confirm the extent to which a properly delayed recall on firm sales is effective. Our findings provide governments and regulation parties with new directions for deploying their investigation efforts to avoid overdue recalls, thereby reducing potential casualties associated with recall delays.
Keywords: Product Cycle; Product Recall; Product-Harm Crisis Management
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