How Do Brands Change Their Advertising Spending in Response to a Rival's Product Recall?

Abstract

A brand manager can interpret a rival's product recall as an opportunity to preempt sales and/or signal superior quality by raising their brand's ad spending. Conversely, they may interpret the recall as a threat that may harm their brand's image and/or lead buyers to draw unfavorable comparisons between their brand and the recalling brand. This interpretation nudges the manager to suppress their brand's ad spending. The authors test the interpretations empirically in the context of 62 substitute car models’ responses to the recall of a competing model. They assess the response over 31 weeks and 308 geographical regions, leading to 591,976 model-week-region observations. Regression discontinuity in time analysis reports that, on average, a substitute brand responds by lowering its ad spending by 50%, suggesting that the threat interpretation dominates the opportunity interpretation. A decomposition of spending by type suggests that substitute brands increase their spending on price advertising by 25%, decrease spending on quality advertising by 71%, but make no adjustment to brand advertising. This nuanced analysis suggests that substitutes attempt sales preemption, avoid quality signaling, and are not worried about brand spillover. A follow-up analysis reports that this advertising strategy strengthens the positive spillover effect of a brand's recall on its substitute brands’ sales volume. The key findings hold for another major automobile recall event in the same market. The findings contribute to the literature on the management of quality perceptions while informing about substitute brands’ managers responses to a rival brand's quality failure and whether the response helps or hurts the substitutes’ sales. Furthermore, the findings build an empirical foundation for future analytic investigation on strategic interactions among brands when a quality defect occurs.