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.