Three essays on pricing, quality, and advertising decisions while anticipating a product recall

Abstract

Product recalls have been rising significantly in both numbers and severity across various industries. The consequences of recalls can be substantial, leading to direct and indirect financial losses for the entire supply chain. Using a game theoretic modelling approach, this thesis examines pricing, quality, and advertising decisions to manage product recalls and mitigate associated risks and losses. The core chapters of the thesis consider three relevant topics on product recall management. In the second chapter, we analyze quality and pricing strategies for two competing firms facing the risk of a severe quality-related recall, which makes the product hazardous and leads to its removal from the market. We develop a two-stage Nash game where the probability of recall depends on the firms’ chosen quality investments, and either firm can experience a recall. Our results indicate that the competitor of the affected firm by the recall should lower its price after the recall if consumers’ price sensitivity changes enough and may increase or keep its price the same otherwise. Surprisingly, considering the risk of a recall does not always lead firms to enhance their product quality. The third chapter considers a monopoly supply chain wherein a manufacturer sells a product through a retailer while anticipating a moderate or minor product recall and subsequent recovery process. Developing a manufacturer-Stackelberg game-theoretic model, we investigate how cost-sharing and revenue-sharing contracts serve as a retailer’s strategies to encourage the manufacturer to enhance product quality, thereby preventing the potential product recall and its associated costs, while also boosting demand. Our results reveal that revenue sharing through bargaining stands out as the most effective contract in driving product quality, diminishing recall probability, and generating higher profits for the manufacturer and the whole supply chain. Nevertheless, the retailer favours typical revenue sharing over the other contracts. In the fourth chapter, we investigate the optimal cooperative advertising and pricing strategies in a bilateral monopolistic marketing channel, including a manufacturer and a retailer, when anticipating a moderate or minor product recall and recovery afterwards. We develop a two-period cooperative advertising game model in which the manufacturer is the leader, and the retailer is the follower. We find that the manufacturer sets a higher wholesale price for its product when there is a recall risk compared to when uncertainties regarding the recall are resolved. Moreover, the retailer’s advertising initiatives and pricing strategies may increase or decrease following the recall, depending on the recall probability and the damage to baseline demand or advertising effectiveness. Finally, the manufacturer consistently favours cooperative advertising pre- and post-recall. This thesis offers several important managerial insights. First, pricing and quality, as well as pricing and advertising decisions, should be managed in an integrated manner to effectively mitigate product recall risks, as independent strategies are less effective. Furthermore, this thesis suggests that managers should adjust their pre- and post-recall strategies in response to changes in the market and consumer behaviour following recalls, such as lost sales and shifts in consumer sensitivity to price, quality, and advertising. Additionally, collaborative contracts between manufacturers and retailers focusing on quality efforts or advertising efforts can significantly enhance supply chain effectiveness when facing product recall risks.