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.