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

Product-harm crises (recalls) carry negative product information that adversely affects brand preference and advertising effectiveness. This negative impact of product-harm crises may differ across recall events depending on media coverage of the event, crisis severity, and consumers’ prior beliefs about product quality. We develop a state space model to capture the dynamics in brand preference, advertising effectiveness, and consumer response to product recalls; integrate it with a random coefficient demand model; and estimate it using a unique data set containing 35 automobile brands, 193 auto sub-brands, and 359 recalls during 1997–2002. Our results reveal that consumers respond more negatively to product recalls with greater media attention, more severe consequences, and higher perceived product quality. Furthermore, they show that sub-brand advertising effectiveness declines by a greater amount than parent-brand advertising and the decline in effectiveness of the recalled sub-brand’s advertising spills over to other sub-brands under the same parent brand. This paper was accepted by Pradeep Chintagunta, marketing.