Empirically Modeling of Consumers' and Firms' Behaviors in the Wake of Product Harm Crisis

Essay One: Consumer Learning in a Turbulent Market Environment: Modeling Consumer Choice Dynamics in the Wake of Product Harm Crisis.;This paper empirically studies consumer choice behavior in the wake of a product-harm crisis. A market with product-harm crisis creates consumer uncertainty about product quality. In this paper, we develop a model that explicitly incorporates the impact of such uncertainty on consumer behavior. We assume that consumers are uncertain about the mean product quality level and learn about product quality through the signals contained in use experience and product harm crisis. We also assume that consumers are uncertain about the precision of the signals in conveying product quality and update their perception of the precision of such signals over time upon their arrival. To study the possible impact of a product-harm crisis on consumer's sensitivities to price, quality, and risk, we also allow these model parameters to be different before, during, and after the product-harm crisis. The model is estimated for a scanner panel dataset that includes consumer purchase history before, during, and after a product-harm crisis that hits the peanut butter division of Kraft Food Australia in June 1996. The proposed model fits the data better than the standard consumer learning model in marketing that assumes consumers are uncertain about product quality level but the precision of information in conveying product quality is known to consumers. Our study also provides substantive insights on consumers' behavioral choice responses to a product-harm crisis. Finally, we conduct counterfactual experiments based on the estimation results and provide insights to managers on crisis management.;Essay Two: An Empirical Model of Dynamic Re-entry, Advertising and Pricing Strategies in the Wake of Product Harm Crisis.;Product harm-crisis may become the worst nightmare for any firm at some point in time. It may affect both the demand side, such as consumer's intrinsic preference and sensitivities to marketing mix, and the supply side such as costs and competition structures. Product-harm crisis always triggers a product recall, and in most cases the affected brand will return to store shelf after the crisis is solved. The timing of re-entry can be a strategic decision for the firms. In this paper, we empirically study firms' re-entry strategy after a major product-harm crisis, taking into account the demand side of market. Two other interactive strategies, pricing and advertising, are also modeled through Markov perfect equilibrium framework. The model is applied to product-harm crisis event that hits the peanut butter division of Kraft Food Australia in June 1996. Substantively we find that (1) the observed "large advertising expenditure" strategy for the unaffected brand before the affected brand re-enters the market is optimal, since a "large advertising expenditure" in this period plays an important role in postponing the time of re-entry for the affected brand; (2) the competition after the occurrence of the product-harm crisis becomes more intensive. The direct consequence of this is that both the affected and unaffected firms are forced to adopt "low margin" and "large advertising expenditure" (comparing with the pre-crisis advertising expenditure) strategies. As a result, the long-term profitabilities decrease, especially for the affected brand whose profitability decreases by 38%. Finally, the counterfactual experiments show that the increase in the effects of the state dependence is one of the major reasons for a more intensive competition after the product harm crisis.