Advertisement

Product Recalls and Channel Pricing

  • Olivier RubelEmail author
Chapter
Part of the International Series in Operations Research & Management Science book series (ISOR, volume 280)

Abstract

We propose a stochastic differential game between a manufacturer and a retailer to investigate how the risk of facing a product recall impacts pricing strategies in marketing channels. By doing so, we analyze whether vendor agreements between manufacturers and retailers, which are signed before any unit is sold, could distort channel profits by aggravating double marginalization. We characterize the equilibrium pricing strategies in closed form for both linear and quadratic costs of recall. We find that the manufacturer and the retailer respond differently to certain clauses of the vendor agreement, but that in equilibrium, such agreements do not distort channel profit, even when costs of recall are quadratic.

Keywords

Marketing channel Pricing Product recall Stochastic differential games 

References

  1. Borah, A., & Tellis, G. J. (2016). Halo (Spillover) effects in social media: Do l? Journal of Marketing Research, 53, 143–160.CrossRefGoogle Scholar
  2. Breton, M., Jarrar, R., & Zaccour, G. (2006). A note on feedback sequential equilibria in a Lanchester model with empirical application. Management Science, 52, 804–811.CrossRefGoogle Scholar
  3. Dawar, N., & Pillutla, M. M. (2000). Impact of product-harm crises on brand equity: The moderating role of consumer expectations. Journal of Marketing Research, 37, 215–226.CrossRefGoogle Scholar
  4. Eilert, M., Jayachandran, S., Kalaignanam, K., & Swartz, T. A. (2017). Does it pay to recall your product early? An empirical investigation in the automobile industry. Journal of Marketing, 81(3), 111–129.CrossRefGoogle Scholar
  5. Haurie, A., & Moresino, F. (2006). A stochastic control model of economic growth with environmental disaster prevention. Automatica, 42, 1417–1428.CrossRefGoogle Scholar
  6. Ingene, C. A., Taboubi, S., & Zaccour, G. (2012). Game-theoretic coordination mechanisms in distribution channels: Integration and extensions for models without competition. Journal of Retailing, 88, 476–496.CrossRefGoogle Scholar
  7. Jørgensen, S., Sigue, S. P., & Zaccour, G. (2000). Dynamic cooperative advertising in a channel. Journal of Retailing, 76, 71–92.CrossRefGoogle Scholar
  8. Jørgensen, S., & Zaccour, G. (2004). Differential games in marketing. Dordrecht: Kluwer Academic Publishers.CrossRefGoogle Scholar
  9. Liu, Y., & Shankar, V. (2015). The dynamic impact of product-harm crises on brand preference and advertising effectiveness: An empirical analysis of the automobile industry. Management Science, 61, 2514–2535.CrossRefGoogle Scholar
  10. Martin-Herran, G., Rubel, O., & Zaccour, G. (2008). Competing for consumer’s attention. Automatica, 44, 361–370.CrossRefGoogle Scholar
  11. Roehm, M. L., & Tybout, A. M. (2006). When will a brand scandal spill over, and how should competitors respond? Journal of Marketing Research, 43, 366–373.CrossRefGoogle Scholar
  12. Rubel, O. (2013). Stochastic competitive entries and dynamic pricing. European Journal of Operational Research, 231, 381–392.CrossRefGoogle Scholar
  13. Rubel, O. (2017). Profiting from product-harm crises in competitive markets. European Journal of Operational Research, 265, 219–227.CrossRefGoogle Scholar
  14. Rubel, O., Naik, P. A., & Srinivasan, S. (2011). Optimal advertising when envisioning a product-harm crisis. Marketing Science, 30, 1048–1065.CrossRefGoogle Scholar
  15. Rubel, O., & Zaccour, G. (2007). A differential game of a dual distribution channel (pp. 547–568). Boston: Birkhäuser.Google Scholar
  16. Van Heerde, H., Helsen, K., & Dekimpe, M. G. (2007). The impact of a product-harm crisis on marketing effectiveness. Marketing Science, 26, 230–245.CrossRefGoogle Scholar
  17. Zaccour, G. (2008). On the coordination of dynamic marketing channels and two-part tariffs. Automatica, 44, 1233–1239.CrossRefGoogle Scholar

Copyright information

© Springer Nature Switzerland AG 2020

Authors and Affiliations

  1. 1.Graduate School of ManagementUniversity of CaliforniaDavisUSA

Personalised recommendations