The Impact of External Parties on Brand-Name Capital

September 28, 2007

Economic Inquiry

On September 30, 1982, Johnson & Johnson announced that three people had been killed as the result of ingesting cyanide-laced Tylenol capsules. Four more Tylenol-related deaths were reported within the next two days. Culminating in 125,000 stories in the print media alone, the poisonings were an event without precedent in American business. The Tylenol brand received over $1 billion in adverse publicity.

As a result, many analysts claimed the brand was dead. But the company president, James Burke, ignoring the advice of government officials and even some of his close associates, decided to spend millions to revive Tylenol. The general opinion today is that Johnson & Johnson and Tylenol made a prodigious comeback, one unparalleled in American business.

The event provides an opportunity to study the effect that an external party can have on the brand name of reputation of a firm. That is, to what degree does a firm’s brand name suffer a loss in value when the firm clearly did not intentionally lower product quality? Do consumers hold firms responsible for the damaging actions of parties not associated with that firm? This study attempts to resolve these issues.

An examination of Johnson & Johnson’s stock price shows that the company’s market losses far exceeded direct costs and losses shared by other pain-reliever producers; this evidence provides support for the Klein and Leffler [1981] theory of brand names as quality-assuring mechanisms. Other pain relievers poisoned by copycat killers had a much lower level of brand-name capital to lose.

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