Product recall decisions in supply chains under product liability

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.