Dynamic pricing strategies based on Consumers’ psychology during product-harm crises

Product-harm crises happen unexpectedly, triggering product recalls and altering consumer psychology, posing significant challenges to brands. This paper examines a monopoly brand selling a single product, identifying three crisis scenarios: no crisis, severe crisis, and mild crisis. Incorporating the crisis’s long-term effect, consumers’ price mapping psychology (PMP), and their vigilance to the crisis, we explore the dynamic pricing strategy for a far-sighted brand manager. The results suggest that in the absence of a crisis, the brand manager, weighing against consumers’ PMP and the law of demand (LOD), sets price based on the product’s basic quality. Regardless of whether the product survives the crisis, a risk premium will always be charged before a crisis to cushion recall costs. After the crisis, price drops, but demand may soften as consumers grow intolerant of implicated products and require products with superior basic quality. Thus, the crisis and its long-term effects inevitably harm both the supply and demand sides. Although the negative impact cannot be eliminated by dynamic pricing strategies, the brand can benefit from greater market share and minimize profit loss rates by leveraging consumers’ PMP and laxity. Interestingly, despite being exploited, consumers benefit from increased utility and consumer surplus. Notably, the hazard myopia of a brand manager is only more beneficial when the crisis arrives later. Brands confronted with crises must reduce production costs or be priced out of the market. By capitalizing on recalled products’ salvage value, the brand will lower the risk premium due to eased recall cost pressures.