Group for Research in Decision Analysis

The impact of a product recall on advertising decisions while envisioning crisis or being "hazard myopic"

Arka Mukherjee

Negatively publicity and goodwill erosion due to product recalls can have disastrous effects on a responsible firm. Goodwill of a firm is positively influenced by advertising. Using a linear demand function based on brand image, we study the optimal advertising strategies of firms in a duopoly environment. We find that the optimal advertisings for both the firms are dependent on the magnitude of the recall risks. A small risk positively affects the recalling firm's performance. If the firms do not foresee the recall ("hazard myopia"), under certain conditions the firm performance can be better than when they envision the crisis.

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