Responding Strategically to Competitors' Failures : Evidence from Medical Device Recalls & New Product Submissions

Medical device firms operate at the frontiers of innovation. When functioning properly, innovative medical devices can prolong and improve lives; when malfunctioning, the same devices may harm patients and lead to product recalls. Product recalls create significant challenges for firms, but simul-taneously generate potentially lucrative opportunities for their competitors. Using the U.S. medical device industry as an empirical setting, we develop predictions and provide evidence that competitor recalls increase unaffected firms’ new product submission activities, establishing a previously un-examined relationship between product failures and product submissions. To tease out potential mechanisms, we examine how the number of competitors in a specific product market influences this relationship. We find that firms increase new product submissions after competitor firm failures in markets that have fewer competitors and, as such, represent the greatest opportunities to increase revenues and profits and capture vulnerable market share. Recalls thus not only create internal problems for firms, but also incentivize their competitors