The Dynamic Impact of Product-Harm Crises on Brand Equity and Advertising Effectiveness: An Empirical Analysis of the Automobile Industry

Abstract

Product-harm crises can adversely affect brand equity and advertising effectiveness. We develop state space models to capture brand and sub-brand equity the dynamics related to product recalls and spending on different levels and types of advertising, integrate them with a random coefficient demand structural model, and estimate it using a unique dataset containing 35 automobile brands, 193 sub-brands and 642 recalls during 1997-2002. Our results reveal that product recall has a direct effect on brand equity only if it increases the chances of crash or fire. This product recall type has a significant negative influence on the effectiveness of each advertising level and type. We develop an optimal advertising model and show how firms can use our model to improve advertising allocation across levels and types during and after the crisis. In response to highest severity recalls, firms should reallocate from sub-brand and brand advertising to promotional and sponsorship advertising.