Dell Battery Recall

It's in the news that Dell decided to voluntarily recall 4 million faulty laptop batteries that were sold in the last a few years. The total cost is estimated to be 200 million dollars. It's reported that there were 6 incidents of overheated battery catching fire, causing property damages. That makes me wonder if the recall makes much economic sense.

For the sake of argument, let me assume that the average damage of each incident is $2,000, including the total loss of the laptop plus the damage to the furniture. Let me further assume that there were some unreported incidents or ones being investigated, and the total number of incidents is 40(To make my math easier), which puts the odds of catching fire at 1 in 100,000. Thus the expected liability for each battery is only 2 cents, but the recall would cost Dell $50 for each replacement. Even if I vastly underestimated the odds and/or the damages and I was off by one order or two, still it would be hard to make the case for a recall. Why not Dell just let the victims sue it in the court and let the tort law take care of it? It looks like a no-brainer to me.

Of course the management of Dell is not as stupid as I make them look like: there are a lot other factors they have to consider. For one thing it is a huge PR campaign, the potential loss of sales due to a bad image could well be worth the cost of the recall. Also litigation costs would be far more than the actual damages. And last but not least, the government might step in and demand a mandatory recall if Dell did not act right now. So I would not say it's a bad decision by Dell to spend the 200 million here.

Now given the fact that Dell has to make the recall now, there might be a better and more efficient way of executing the recall if we all can be Coasian. The thing I wonder is what value a Dell laptop owner would put on the replacement, I bet some owners would continue to use the old battery as a backup after they get the replacement since the odds of catching fire is pretty slim. For the sake of argument let me assume that the dollar value a typical Dell customer would put on the replacement is $25, half of what would cost Dell to replace the battery. Hypothetically Dell could negotiate with each affected customer to settle somewhere between $25 and $50 and both parties would be better off. Apparently there are two problems with this approach: the transaction costs will be prohibitively high and customers will not voluntarily reveal their values. But economists have a tool to alleviate those problems: signaling. Dell could give their customers a choice: they can either demand a replacement or get $25 in cash and waive their future rights of litigation. Under this scenario those who value the replacement under $25 would be better off getting the cash compensation and those who value more than $25 would be the same, and at the same time Dell would save some money. From an economist point of view, this solution is Pareto superior to the simple universal recall.

So far I've deliberately withheld a key piece of information to make my argument: it won't cost Dell much for the recall, Sony will pick up the tab since it's Sony that supplied the faulty batteries. In other words, Dell has no incentive to improve the efficiency since it's not paying(#4 of Mankiw's 10 fundamental principles of economics). But I am being stubborn here and posing the same Coasian argument, but this time to the management of Sony: suppose the signaling scheme would cut the total costs of recall to 150 million, Sony could well negotiate with Dell to split the 50 million surpluses, as the result Dell will profit from the recall by 25 million and Sony will save 25 million on the recall. Again both parties are better off and it's Pareto superior to the simple recall.

You still think economiscs is a dismal science?