Managing quality and pricing during a product recall: An analysis of pre-crisis, crisis and post-crisis regimes

Product recalls are often consequences of quality failures. While such failures are related to a manufacturer’s or supplier’s design quality, the perceived quality of products may be severely damaged when a product harm crisis occurs. However, most often, such a crisis will not last forever, and a firm at fault eventually recovers. Considering an optimal control model, we investigate the optimal pricing decisions, advertising and quality efforts of a firm while it anticipates a product recall and a subsequent recovery. We show that the decisions and profits of the manufacturer vary widely with the stochastic parameters: crisis likelihood, recovery likelihood, crisis impact and recovery intensity. We illustrate that myopic firms are more severely affected by a product recall than farsighted firms when the impact of recall is high. However, it might not be so detrimental to take myopic decisions for low impact recalls. In the absence of recovery, a product recall can lead to bankruptcy. High initial perceived quality may not insulate a firm against bankruptcy.