Product recall decisions in supply chains under product liability

Abstract

This paper builds a two-stage game supply chain model where a manufacturer and a retailer transact via a wholesale price contract. Based on a standard wholesale price contract, the model captures the manufacturer's product recall decisions under product liability regulations. With the subgame perfect equilibrium, the comparative statics results show that (1) the manufacturer's product recall decision is independent of product liability; (2) except that in response to a raised product recall cost, the manufacturer's product recall decision and supply chain members' financial performance change harmoniously, the manufacturer's product recall decisions are in conflict with supply chain members' financial performance in response to changes in consumer's harm and product quality; (3) whether the manufacturer's wholesale price increases in product quality (product recall cost) depends on the relative size of product liability and consumer's harm.