Recently Toyota recalled some 5 million plus cars, including the Camry which is the most popular car in America. The problem with many of these cars were either floormats that became caught underneath the accelerator, or an accelerator pedal that became stuck and led to out of control vehicles. It should be pretty obvious that this recall will impact not just the demand for Toyotas, but also the demand and supply for all different models of cars and trucks. Toyotas and other brands of cars are substitutes for one another. In a response to Toyota’s production shutdown and recall, other auto manufacturers like GM and Ford are trying to attract some Toyota drivers to their brands. Volkswagen has explicitly argued against the practice of trying to lure customers away.
Now, if you carefully think about the effects of the recall, you might notice that production costs for Toyota will not necessarily change. However, at the margin, there are some more expensive to produce models that Toyota manufactures. A problem similar to the sticking accelerator pedal has been linked to Prius software, where Toyota makes very little (if any) profit.
Questions you might try to answer:
- What should the overall impact be on the car market because of the Toyota recall? By ‘market’ you should be referring to Supply/Demand/Price/Quantity and you can differentiate between different types of cars. Try to think deeper than just “This will lead to a decline in Toyota’s demand” which doesn’t really say much. Do you expect Toyota to change their prices, and if they do, what should be the impact on their firm?
- What impacts do large recalls like this have on competitors? Is this recall necessarily a good thing for all other car makers?
- Might GM’s strategy of attracting Toyota consumers backfire? What might happen if GM is faced with a large recall in the near future?
- Can you compare the large recall of Toyota cars and trucks to a large recall in a highly differentiated market like this? If so, can you draw any inferences from previous recall experiences?