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Abstract
This chapter elucidates the concept of the spillover effect and explores the underlying reasons behind its occurrence in the context of product recalls. It explains how product recalls can extend beyond the boundaries of the recalled items, impacting other products within the same brand or company. The discussion then delves into various factors that can affect the magnitude of spillover effects on competitors, offering insights into how these dynamics unfold. Additionally, it explores the repercussions of product recalls on B2B customers, explaining how such incidents can reverberate within B2B relationships and affect business interactions. To underscore these concepts, practical examples are provided, illustrating the implications for managers in different scenarios. The chapter also highlights strategies that businesses can deploy to mitigate the adverse consequences of product recalls, offering actionable insights for managing and minimizing the spillover effect. Overall, this chapter provides a comprehensive understanding of the spillover effect, detailing its impact on various stakeholders and offering guidance on how to address and mitigate these challenges effectively.
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This study examines spillover effects following Volkswagen’s admission of emissions cheating. We first estimate initial operational losses of 8.45% of Volkswagen’s equity market capitalization on the date before the announcement, reputational losses up to five times these losses, and significant negative shocks to its stocks and bonds. Analyzing spillover effects from this shock beyond the usually only measured losses in equity value, we find significant negative net spillover effects to European competitors and suppliers in both stock and bond markets. Studying the economic effects in more detail, we show that Volkswagen’s total losses of 27.4 billion euros in terms of changes in equity market values over the first five event days are almost entirely composed of abnormal losses. Furthermore, competitors (suppliers) overall suffered 18.3 (12.6) billion euros of abnormal losses during this time, with 60% (69%) of the firms exhibiting negative changes, especially European competitors and suppliers connected to Volkswagen. These figures are further increased by negative bond market value changes. Overall, our results strongly emphasize that neglecting debt holders losses can lead to an underestimation of such events.
Spillover refers to the extent to which a message influences beliefs related to attributes that are not contained in the message. The authors find that when consumers are not familiar with a brand, negative information spills over to attributes that are associated with the target attribute but not mentioned in the message. However, positive information does not. When consumers like the brand, a spillover occurs for the positive information as well. When consumers are committed to the brand, the spillover of negative information is minimized, but positive information spills over more freely to other associated but unmentioned attributes.
P roduct-harm crises are among a firm's worst nightmares. A firm may experience (i) a loss in baseline sales, (ii) a reduced own effectiveness for its marketing instruments, (iii) an increased cross sensitivity to rival firms' marketing-mix activities, and (iv) a decreased cross impact of its marketing-mix instruments on the sales of competing, unaffected brands. We find that this quadruple jeopardy materialized in a case study of an Australian product-harm crisis faced by Kraft peanut butter. We arrive at this conclusion by using a time-varying error-correction model that quantifies the consequences of this crisis on base sales, and on own-and cross-brand short-and long-term effectiveness. The proposed modeling approach allows managers to make more informed decisions on how to regain the brands' pre-crisis performance levels. History: This paper was received July 29, 2005, and was with the authors 3 months for 3 revisions; processed by Bart Bronnenberg.
The Volkswagen emissions scandal began in 2015, when the U.S. Environmental Protection Agency (EPA) announced that diesel cars produced by Volkswagen from 2009 through 2015 were in violation of emissions standards. We analyse the impact of this announcement on transaction prices for Volkswagen cars on the U.S. eBay Motors. The main focus is on Volkswagen cars other than the 2009-2015 diesel models, namely, vehicles that did not violate EPA standards, allowing us to assess whether the negative shock received by the emissions standards violators spilled over to other Volkswagen models that were in compliance. Our difference-in-differences results show that final bid prices declined after the announcement by 14% for non-violating diesel cars and 9% for non-violating gasoline cars. Our analysis also provides little evidence of considerable changes in the numbers of participating bidders, bidding strategies, numbers of listings, and reserve-price strategies, suggesting that the drops in prices likely resulted from lowered willingness to pay from buyers.
Prior studies on product recalls have found that product recalls hurt the recalling firm’s market value. However, little is known about how a product recall affects the market value of the recalling firm’s competitors. It is not clear whether a recall helps or hurts the market value of the recalling firm’s competitors. Using data from the US automobile industry, we find that a product recall by a firm with high corporate product reliability hurts the market value of its competitor (negative spillover). Corporate product reliability refers to a firm’s reputation for providing reliable products. However, the negative spillover effect is buffered or attenuated by the corporate product reliability of the competitor. Further, the negative spillover effect of a recall on a competitor’s market value can be detected even when the competitor makes a positive announcement in the form of a new product pre-announcement (NPPA) after a recall in the industry. This effect is again attenuated by the strength of the competitor’s corporate product reliability.
Online chatter is important because it is spontaneous, passionate, information rich, granular, and live. Thus, it can forewarn and be diagnostic about potential problems with automobile models, known as nameplates. The authors define "perverse halo" (or negative spillover) as the phenomenon whereby negative chatter about one nameplate increases negative chatter for another nameplate. The authors test the existence of such a perverse halo for 48 nameplates from four different brands during a series of automobile recalls. The analysis is by individual and panel vector autoregressive models. The study finds that perverse halo is extensive. It occurs for nameplates within the same brand across segments and across brands within segments. It is strongest between brands of the same country. Perverse halo is asymmetric, being stronger from a dominant brand to a less dominant brand than vice versa. Apology advertising about recalls has harmful effects on both the recalled brand and its rivals. Furthermore, these halo effects affect downstream performance metrics such as sales and stock market performance. Online chatter amplifies the negative effect of recalls on downstream sales by about 4.5 times.
This research examines the short-term impact of a product recall on a brand ecosystem by investigating the following questions: How do product recall spillover effects spread to (i) the recalled brand’s related product categories, (ii) competing brands, and (iii) private label brands? Studying the 2003 Land O‘Lakes butter recall case using a difference-in-differences model, our research shows that negative spillovers occur within the same brand family, carry over to private label brands and then quickly dissipate, but do not carry over to competitor brands. Managerial implications and directions for future research are provided.
Product-harm crises often result in product recalls, which can have a significant impact on a firm's reputation, sales, and financial value. In managing the recall process, some firms adopt a proactive strategy in responding to consumer complaints, while others are more passive. In this study, the authors examine the impact of these strategic alternatives on firm value using Consumer Product Safety Commission recalls during a 12-year period from 1996 to 2007. Using the event study method, the authors show that regardless of firm and product characteristics, proactive strategies have a more negative effect on firm value than more passive strategies. An explanation for this surprising result is that the stock market interprets proactive strategies as a signal of substantial financial losses to the firm. When a firm proactively manages a product recall, the stock market infers that the consequence of the product-harm crisis is sufficiently severe that the firm had no choice but to act swiftly to reduce potential financial losses. Therefore, firms dealing with product recalls must be sensitive to how investors might interpret a proactive strategy and be aware of its potential drawbacks.
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