Product Recalls in B2B Secondary Markets: Evidence from the U.S. Automobile Industry

Abstract

The impact of product recalls in business-to-business (B2B) secondary markets remain largely overlooked by existing research that tends to focus on recalls of new and consumer products. With detailed vehicle-level data about dealer transactions in the U.S. automotive market, the current research establishes how B2B buyers respond to recall announcements. Although they have no direct liability, B2B buyers adjust their purchase prices, similarly to consumers; average transaction prices for recalled products drop by 4.2% following a recall announcement. Relational contracts, such as franchise laws, moderate the price impacts, such that franchise dealers exhibit greater price declines than independent buyers. This study also addresses potential spillover effects on non-recalled vehicles and shows that quality uncertainty and product segments significantly influence price changes. Vehicles with mid-scale quality ratings attain smaller price increases than those at the quality extremes, indicating a U-shaped relationship. Furthermore, non-recalled vehicles in the same segment achieve a 1.4% price increase if they represent the same automaker; competitor vehicles suffer a .8% decrease. These detailed findings provide critical insights for automakers and policy makers, emphasizing the distinct characteristics of B2B secondary markets and the nuanced impacts of both quality and product segmentation for recall spillover effects.

Keywords: business-to-business, contagion effect, competitive effect, difference-indifferences, product recalls, quasi-natural experiment, secondary market, spillover, used vehicle