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Promotions as competitive reactions to recalls and their consequences

Abstract

Firms may profit from responding to competitors’ product recalls, but relatively little is known about the nature and efficacy of these reactions. The authors empirically (1) test the link between a major recall (by Toyota) in the automobile context and competitors’ promotional responses and (2) assess the effectiveness of promotional responses and how it varies across brand tiers. They find that though Toyota recalls induced competitive promotions of approximately $850 on average, the competitive promotional reactions did not significantly affect sales on average. However, the results differ substantially by brand tiers. While 50% of premium brands increased promotions, only 36% of nonpremium brands did so. Among premium brands, 86% benefited from promotional reactions; in contrast, the effects of promotions on sales were nonsignificant or even negative for most nonpremium brands. These findings suggest that well-established results on promotional behaviors and their effectiveness may not hold in the context of recalls.

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Notes

  1. Mattel, the leading toy manufacturer in the United States, recalled more than 19.6 million products in 2007 because of design flaws and lead-based paint (Thottam 2007), incurring significant financial losses (Story and Barboza 2007). The massive “unintended acceleration” recalls of Toyota and Lexus vehicles in 2009 and 2010 led to a more than 20% drop in Toyota’s stock price in just over a month (Brauer 2014), approximately $2 billion in costs to fix affected vehicles, and lower sales and reduced value of leased vehicles (Isidore 2010).

  2. The treatment group consists of non-Toyota car models in the same categories as car models recalled by Toyota. We then match each treatment car model to a control car model in a different category, based on manufacturer and brand tier, attributes, and manufacturer suggested retail price. Details are discussed later.

  3. Firms can also react to recalls through advertising strategies. Regrettably, we cannot study such advertising reactions in our institutional context because the advertising data are too sparse and treatment and control groups are not comparable.

  4. A few studies show that negative repercussions are not universal (Berger et al. 2010; Kalaignanam et al. 2013), even though they might be the norm.

  5. The content regarding the crisis comes from http://www.motortrend.com/features/auto_news/2010/112_1001_toyota_recall_crisis/viewall.html.

  6. In addition to floor mat and gas pedal defects, driver error was found to have contributed to the majority accidents from sudden acceleration of Toyota and Lexus vehicles (Mitchell et al. 2011). However, our analyses focus on the short-term impacts of this crisis, which occurred before the role of driver error was reported.

  7. It is arguable that the Toyota recall represents a negative quality shock to all the players in the category. Yet a review of the media reports during the crisis (e.g., Kelly 2012; Sawyers 2010) shows overwhelming reference to the negative quality of Toyota’s cars, and Toyota’s negligence, rather than the competitors.

  8. See http://www.swadeology.com/2014/02/how-do-car-companies-make-money/.

  9. We demonstrate the robustness of the results even when this assumption is relaxed in the Results Section.

  10. Interviews with sales managers at dealerships of nine different brands suggest that a majority of the managers believe that if a major recall happens to their brands, competing car models would increase promotions; but only some managers suggested promotional reactions help sales.

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Acknowledgements

The authors thank the Darla Moore School of Business for financial support. They also thank Gary Lilien, Marnik Dekimpe, Venkatesh Shankar, Linli Xu, Yi Zhu, Seshadri Tirunillai, Cem Ozturk, Fue Zeng, and participants at the Marketing Science Conference 2016 for their valuable comments.

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Correspondence to Chen Zhou.

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Marnik Dekimpe served as Area Editor for this article.

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Zhou, C., Sridhar, S., Becerril-Arreola, R. et al. Promotions as competitive reactions to recalls and their consequences. J. of the Acad. Mark. Sci. 47, 702–722 (2019). https://doi.org/10.1007/s11747-018-0611-8

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  • DOI: https://doi.org/10.1007/s11747-018-0611-8

Keywords

  • Product recalls
  • Competitive reactions
  • Promotions
  • Quasi experiments