Product recalls, firm reputation, and dynamic incentives in pharmaceutical markets

This project studies how product recalls affect consumer demand, firm incentives, and market outcomes in differentiated pharmaceutical markets. Recalls protect consumers from unsafe products, but they may also create shortages, shift demand across therapies, and damage firm reputation beyond the recalled product. We develop a dynamic oligopoly framework in which multiproduct firms choose prices and recall intensity, while consumers make product choices based on prices, availability, characteristics, safety, and a firm-level stock of recall history. On the demand side, consumers differ in their sensitivity to price, safety, and reputational risk. Recall shocks may induce substitution toward non-recalled competitors or generate broader stigma effects that reduce demand for the entire therapeutic class. The model also emphasizes that the outside option may itself be risky, since delaying, abandoning, or switching treatment can carry health consequences. On the supply side, firms face a dynamic trade-off: recalling today reduces current sales and may create shortages, but limits future liability, regulatory intervention, and reputational damage; delaying preserves current profits but increases future risks. The framework therefore links recall timing and intensity to forward-looking firm behavior, competitive spillovers, and consumer welfare. It provides a structural basis for evaluating counterfactual recall policies, including earlier, delayed, partial, or regulator-mandated recalls.